Brexit Used to Mean Brexit. What Does it Mean Now?
Comment of the Day

October 17 2018

Commentary by Eoin Treacy

Brexit Used to Mean Brexit. What Does it Mean Now?

This article by John Authers, formerly from the FT, now at Bloomberg may be of interest. Here is a section:

It is only in the last few weeks that the FTSE 250 has dropped meaningfully further behind the rest of the world’s stock markets compared with its position immediately after the referendum. There is a similar outcome if we look at the pound on a trade-weighted basis as calculated by Deutsche Bank AG:

On this basis, the pound remains almost 20 percent weaker than its 2015 peak, but it is also some 5 percent stronger than at its recent low in October 2016, when May first unveiled her plan to seek what is now known as a “hard Brexit,” in which the UK left the EU without attempting to stay in the EU’s tariff-free single market, in a speech to the Conservative party’s conference.

The pound’s resilience is remarkable given the great level of uncertainty. This is in large part because the issues now rest almost entirely on U.K. politics. Broad outlines of a deal have been thrashed out. The risk that the EU, a cumbersome body if ever there was one, rejects a final deal are not trivial, but by far the greatest risk is that no deal can pass the U.K. parliament. Foreign-exchange strategy notes on sterling are now almost entirely taken up with the mathematics of Westminster.

So, avoiding the technical niceties of trade and immigration policy, the source of greatest uncertainty is the U.K.’s parliament, where four broad political options remain

* It agrees to a “deal” on its future relationship with the EU;
* It goes ahead with a “no deal” option, with future trading relations with the EU bloc set by World Trade Organization rules;
* It votes down a deal and a general election (to vote in an entirely new House of Commons) is called; 
* It votes down a deal and another referendum on Brexit (known as a “People’s Vote” to its supporters) is called.

There is great difference between these options, and great political risk. But neither the stock market nor the foreign-exchange market appears to see the situation as much more alarming than it was at the end of June 2016.

Eoin Treacy's view

None of the negotiating parties have much of an incentive to conclude the talks so offering the UK an additional year for a transition agreement is a fresh sign that the Europeans see talks going on even longer than previously anticipated. For Theresa May’s part she has to take any deal agreed back to parliament where her weakened government faces the real threat of being defeated or relying heavily on the opposition. This is not new news which is why the Pound has been relatively stable against the Euro.
A general election where Labour has a chance of winning is likely to be a potentially significant catalyst for the Pound but then speculation is likely to swing between whether Corbyn supports closer ties to the EU and/or embarks of mass nationalisation as he has promised. The €1.10 area has represented support over the last two years and a sustained move below that level would be required to question support building.

The FTSE-250 Midcaps Index exhibits a short-term oversold condition as it paused in the region of the February and March lows but needs to rallying meaningfully to signal more than short-term steadying. Over the course of the impressive uptrend from the 2008 lows, the Index has experienced a number of deep reactions and but each of those has been concluded with an impressive rebound. That is what is now required to signal a return to demand dominance.

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