Tag Archives: Brexit

Sterling singing to (leaked) tune ahead of Theresa May speech

Reports in the British press about the content of Theresa May’s planned speech tomorrow seem to confirm that the prime minister may sacrifice access to the Single Market in exchange for control over EU immigration into the UK.

Unsurprisingly perhaps, Sterling has weakened further but the currency may get some (temporary) respite if the content of Theresa May’s actual speech is somewhat more conciliatory.

In particular I would expect markets to focus on whether the UK government has moved closer to agreeing to a transitional arrangement once the UK has actually left the EU and whether any progress has been made in protecting the all-important UK services sector.

About 45% of the UK’s total exports are destined to the other 27 EU member states and about 53% of its total imports come from the EU. In comparison, only about 9% of the EU-27 exports of goods and services are destined for the UK. Similarly, only 9% of the EU-27 imports of goods and services come from the UK.

The EU thus has far more leverage over the UK than vice-versa assuming these 27 EU member states are willing and able to negotiate as one trading block, in my view. This imbalance is even greater in traded goods alone.

However, when it comes to services, the picture is somewhat more balanced and the UK may arguably have a stronger bargaining hand.

Simply put the EU buys and sells a far greater share of its services to/from the UK than it does for goods and it may be difficult for EU countries to substitute imports of financial services from the UK given London’s pre-eminence as a financial centre. Read more

UK inching towards Brexit

British Prime Minister Theresa May will make a speech on Tuesday 17th January in which she will set out in greater details her plans for the UK’s exit from the EU.

There have been few signs that she is willing to tone down her mantra of the UK regaining control over immigration in exchange for a bespoke trading deal with the EU which may exclude access to the Single Market.

If Theresa May sticks to her guns next week I would expect Sterling to weaken further.

A sell-off in Sterling could be partly curbed if Prime Minister May agrees more explicitly to a transition agreement whereby the UK still retains some of the benefits of EU membership even after the UK has officially left the EU.

If MPs perceive Theresa May’s speech as insufficiently detailed or it is not backed up with a detailed and formal government white paper, parliament may decide to delay or even scupper the process by which Article 50 is triggered.

This would at the margin increase the perceived odds of the UK remaining in the EU and may provide some relief for Sterling.

However, I would view this as only a temporary reprieve as ultimately the government has a popular mandate for the UK to leave the EU.

The apparent resilience of British economic growth since the June referendum has given weight to the arguments that the economy can easily weather the UK’s exit from the EU and that the British government is in a strong negotiating position.

However, the risk now is perhaps that too much confidence is being placed in the British economy’s ability to weather a number of possible forthcoming challenges. Read more

The A-Team had a plan, the British government has a nebulous goal

The UK has its own eclectic A-Team led by Prime Minister May, tasked with getting the UK out of the EU and securing a more beneficial relationship with trading partners.

Theresa May, David Davis, Liam Fox and Boris Johnson have been dealt a tough hand and unsurprisingly have so far refused to reveal the intricate details of their daring plan.

But voters, businesses, parliament, EU leaders and foreign trading partners are pressing the government to elaborate on its tactics and strategies for Brexit.

There was break-through of sorts on 7th December, with the 650 members of the House of Commons (MPs) voting overwhelmingly to allow the government to trigger Article 50 by end-March in exchange for publishing the details of its Brexit plan.

But the devil is in the detail – or lack thereof. This parliamentary vote is not binding and the government has only agreed in the vaguest of terms to publish its plan for Brexit.

If MPs receive the plan late in the game and/or it is insufficiently detailed and assuming the Supreme Court rules that government has no prerogative to trigger Article 50, parliament may decide to delay or even scupper the process by which Article 50 is triggered.

Moreover, this likely vote in the House of Commons and House of Lords may well be only one of multiple votes which parliament has to hold between now and the approval of a final treaty between the UK and the EU.

In addition to these possible parliamentary hurdles, the government may also have to navigate a number of pending legal cases.

Some of these parliamentary votes may not take place and these legal actions may fail. There is certainly scope for further compromise between Theresa May’s government and parliament.

But the risk is that this reputation-sapping cat-and-mouse game extends beyond March, in turn making it far more difficult to predict the end-outcome – which ranges from the UK reverting to WTO rules (the “hardest” form of Brexit) to the UK staying in the EU.

Given the uncertain path which British executive and legislative bodies will take to reach a difficult-to-predict outcome at an unidentifiable point in the future, forecasting Sterling remains fraught with difficulty.

In this context I would expect Sterling to continue lacking direction near-term, particularly as the FX market has, it would seem, already priced out the more negative scenarios for the UK economy. Mixed UK data may not provide Sterling with much direction either way.

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UK economy post referendum – for richer, but mostly for poorer

We may well never know the true extent of the impact of the EU referendum outcome on the British economy, markets and ultimately standards of living. This may not be the most satisfying conclusion, but this uncertainty is one which policy-makers will have to grapple with.

As to the bigger question of whether the UK is better off today or will be better off in years to come when one takes into account not only the impact on the economy but also broader, less tangible issues such as sovereignty, the answer is and will likely remain even more subjective.

In any case, available data paint a patchy picture of the UK economy post-referendum. Construction and services have been harder hit than manufacturing. Retail sales were strong in July thanks in part to a robust labour market and plentiful lending. While this defies the collapse in consumer confidence temporary factors may also have been at play.

The residential property market at a national level has been softer but resilient post referendum. Mortgage lending remains depressed but government policies are for now more likely to blame. The commercial property market has been harder hit.

Sterling’s 10% collapse since the referendum, following a 10% depreciation between November and June, is seemingly supporting economic growth and demand for UK assets even if history suggests that it is no panacea. Its inflationary impact has so far been very modest but the risk is a squeeze on profit margins and real wages.

At the same time sterling’s collapse has tangibly eroded the UK’s net wealth, at least when expressed in foreign-currency terms – a fact largely ignored by policy-makers and the media.

I would expect the BoE to continue favouring monetary and credit policies which explicitly help spur lending, spending and investment and, implicitly at least, help cap sterling. While this may not translate into another policy rate cut or round of QE near-term, the BoE is likely to keep this option firmly on the table if the UK economy fails to return to trend in the next six months.

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Bank of England rate cut – Seven years in the making

For the past few years, the Bank of England’s MPC meetings have been pretty straightforward affairs, with the policy rate firmly on hold at its record low of 0.5%.

But the referendum result has dramatically changed the British political landscape and amplified the uncertainty over the near and long-term outlook for the UK economy.

A 25bp rate cut today is perhaps not quite the foregone conclusion which markets are almost fully pricing in. The BoE could today make valid arguments both to support a 25bp rate cut and no change.

On balance, however, I think the BoE has more compelling reasons to cut its policy rate 25bp today than to leave it on hold.

First, BoE Governor Carney has made clear that a rate cut was potentially on the cards, making it harder for him to backtrack.

Second, the British economy was showing clear signs of weakness even before the referendum.

Third, there are signs that economic and political uncertainty post referendum are already having a negative impact on consumption, investment and confidence.

Finally, the BoE may be the only game in town for now as there is limited room for domestic fiscal policy and global monetary policy reflation.

But cutting the policy rate to 25bp or even zero is clearly no panacea to the challenges which the UK faces in coming weeks, months and perhaps even years and there are valid counter-arguments as to why the BoE may leave its policy rate on hold today.

These include that the BoE should save its (limited) bullets and wait for more hard data, a BoE rate cut would set in motion self-fulfilling prophecy, the BoE should balance post-referendum chaos with a steady policy rate, the global equity market rebound has removed the sense of urgency and a rate cut could trigger uncontrolled Sterling depreciation.

Regardless of today’s decision, the BoE’s accompanying minutes will likely try to capture this new paradigm.

A rate cut today would still leave the BoE the option of cutting rates again at its 4th  August meeting but negative interest rate policy and/or quantitative easing are still likely to be measures of last resort. Read more

Post Referendum Circular Reference

It has been a fortnight since the UK electorate voted to leave the EU and the British political and financial landscape has already changed dramatically. But what we don’t know or can only tentatively forecast still dwarfs what we know.

The referendum result simply reflected a popular preference for the UK to leave an international organisation, nothing less, nothing more. There is no precedent for UK and EU leaders to rely on and Article 50 is at best only a very skinny rule book.

For all intents and purposes UK and EU leaders are flying blind. It’s not even obvious who is at the controls, let alone who will lead negotiations on behalf of the EU and in particular the UK following seismic changes in political personnel.

The next steps are thus anything but straightforward and the UK government and EU are currently caught in a prisoner’s dilemma, with none of the key players seemingly willing to make the first move.

The referendum result is not legally-binding, only advisory, and therefore the Lower House of Parliament will likely have to vote on whether to trigger Article 50. But the British government has so far provided only a vague wishlist and simply doesn’t know what the EU may or may not agree to.

Parliament will not want to kick start an almost irreversible process whereby the UK has announced a divorce but doesn’t know the terms and conditions of this divorce, let alone what its new relationship will look like. Unsurprisingly, the British government is playing for time.

But EU leaders have suggested that discussions about the UK’s exit from the EU and future trade agreements were conditional on the UK government first triggering Article 50. And that takes us back to square one.

When this deadlock is broken will depend on many variables, including the length of the stalemate itself, who is in charge at the point of making a decision and the ability and willingness of negotiating parties with different vested interests to compromise.

I would argue that the longer this stalemate lasts, the greater the likely damage to the UK and EU economies and the greater the odds that Article 50 is not triggered in the first place or that a mutually satisfactory deal is eventually reached. Early British general elections cannot be discounted, nor can a second referendum in a more extreme scenario.

Assuming that the current circular reference paralysing EU and UK leaders is unbroken near-term, the associated uncertainty will likely continue to weigh on the UK economy, sterling and global risk appetite. Whether this morphs into a deeper and more widespread crisis may boil down to how patient global financial markets are willing to be. Read more

UK referendum on EU membership – Darkness before dawn

Negotiations over – One-and-done referendum set for 23rd June 2016

For the second time in just over a year the British electorate will take part in a key national vote, with Prime Minister David Cameron having confirmed a public referendum on 23rd June 2016 on whether the United Kingdom (UK) should remain a member of the European Union (EU). David Cameron announced last week that he had negotiated and agreed with the EU executive to improved terms and conditions for the UK’s EU membership in the key areas of migrant welfare payments, safeguards for Britain’s financial services and the UK’s independence from further EU integration and regulations. Read more