It’s good to be home, back at my desk and assessing the markets. The Chart Seminar this week in London was as much an educative experience for me as I hope it was for the delegates. One of the clearest impressions I got from people in the UK is just how sick they are of discussions of Brexit and just wish it was all over. Unfortunately, that prospect is unlikely to be in sight anytime soon.
Let us set aside for a moment who will be prime minister next week because the potential choices available will be no different even if there is an election. However, an election is likely, because without the DUP Theresa May does not have a majority without relying on the good graces of the Labour Party who mush surely smell blood in the water.
The government could decide to accept the deal. That would mean the UK will be agreeing to a quasi- membership agreement which will tie it into the EU’s ecosystem without giving the electorate any ability to influence the shape of that system. Let’s call this the membership in all but name solution with potential for the transition agreement to be extended; potentially indefinitely. This is the least disruptive solution and ensures the status quo will survive.
The government could decide to dispense with the agreement. That would mean the UK will go back to trading with the EU as if it is a foreign country which is basically what people thought they were voting for in the first place. That would leave the UK with the ability to compete on a trade, regulation, taxation, currency and incentive basis which would be essential to counterbalance the knock-on effects of such a large dislocation in the economic status quo.
Those are the two relatively easy to comprehend solutions but where we get into the weeds is when we start to think about other options. If there is an election it is very questionable whether there will be a single party with a majority so the uncertainty would not be dispelled. If there is a referendum then what will the question be?
The most likely scenario, right now is the question would be to accept the negotiated deal or to leave the EU without a deal. In other words, hard Brexit or soft Brexit. It could also be whether to stay in the EU or accept the negotiated deal. Let’s call that no-Brexit or soft-Brexit. The final alternative would be to dispense entirely with what many consider an imperfect document and vote for in or out on the full understanding that out means a clear break. Let’s call that the hard-in or hard-out Brexit.
If we give an equal weight to these three arguments, (believe me, I know we could argue all day about whether that is the right thing to do) then all three include a form of Brexit and two include no Brexit which suggests some form of Brexit still remains the most likely outcome. The Pound formed a downside weekly key reversal against the Euro this week, from the upper side of its two-year range. It is now testing the progression of higher reaction lows evident since August which will need to hold if the Pound is to continue to be given the benefit of the doubt against the Euro.
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The FTSE-250 Midcaps Index is often regarded as one of the better reflections of the UK economy. It has been prone to ranging over the course of the last decade and there have been occasions when it has traded below the trend mean. It is not alone among global midcap indices experiencing selling pressure so that is one consideration but the added uncertainty of Brexit is a headwind for the Index. It is coming back to test the October lows above 18,000 and ideally that level needs to hold if the benefit of the doubt is to given to the upside.