Archives of “Brexit” tag

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FT report that UK PM Johnson’s 3-year spending master plan to be ditched

  
  Analysis
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Financial Times say that UK Chancellor Sunak has told the PM that current plans should not go ahead due to the chaos of Covid-19.

A decision to scrap the three-year review in favour of a stopgap single-year settlement would be a setback for Mr Johnson, who saw the event as a chance to map out his priorities for a post-Covid world.
Johnson and Sunak have been discussing whether anything can be salvaged from binned plan.
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Brexit trade talks appear to be floundering. Coronavirus outbreak infections surging. Lockdown accelerating, and resisted.  Not a lot of good UK news about at present.

“Who will win the election?” is the wrong question

  
Analysis, Politics
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“Will there be a clear, uncontested and accepted winner?” is a better question

"Will there be a clear, uncontested and accepted winner?" is a better question
The betting odds of a Biden Presidency ticked higher after yesterday’s debate. I believe Trump’s constant interrupting was at least partly strategic in the hope of tripping up Biden and making him look more like the bumbling caricature he’s tried to construct. By and large that didn’t work and I doubt Trump won over many undecideds.
Given the polling lead, Biden should be a large favourite but he’s stuck at 60/40 because no one can forget Trump’s upset win over Hillary Clinton, or Brexit.
For markets, I think the outcome itself is less important in the short term than the question of whether or not their will be a clear winner; and whether Trump will ever concede.
BMO’s fixed income team writes today about the tail risk of a contested election but ponders the degree to which the consensus opinion is already fully incorporated into current valuations.
Let’s face it, very few in the market are anticipating a smooth election nor for any potential transition of power to be uneventful. The extent to which November serves to disrupt functioning of the federal government or fuel further civil unrest remains to be seen and, frankly, is the most significant tail risk as we ponder potential outcomes.
I’m open to the ‘sell the rumour, buy the fact trade’ but skeptical that it’s even possible to price in uncertainty in that way. Uncertainty is — by definition — something that persists for an indefinite amount of time. If Trump refuses to concede even on a clear loss, he will still have a strong political base and I expect him to use it to dog Biden for years. It’s a question of how far he’s willing to go and with Trump, the sky is the limit.
The ‘buy the fact’ trade relies on an eventual return to Obama-era levels of civility (which isn’t saying much) but I just don’t think that’s coming.

Brexit – UK says not afraid to walk away from talks. Less than 20% chance of a deal.

  
Analysis, Forex
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A couple of UK media items on Sunday with Brexit developments.

The UK’s chief Brexit negotiator David Frost spoke with the newspaper the Mail on Sunday
He said that the UK would leave the transition arrangement “come what may” in December. That is, deal or no deal the UK is out.
Meanwhile in the Sunday Times:
  • planning for no-deal has ramped up
  • senior figures in government have predicted that the chance of securing a Brexit trade agreement with Brussels is now less than 20%
Links for each (may be gated) if you’d like more
GBP is trading on wide spreads in early movement. Its just before:
  • 8 am in NZ
  • 6 am in Sydney
  • 5 am in Tokyo
  • and 4 am in Singapore & Hong Kong
If you are familiar with how forex market times work you’ll know that liquidity right now Is super thin. GBP swinging a little:
A couple of UK media items on Sunday with Brexit developments.

Here’s a EUR/USD forecast (to 1.15) with the ECB expected to be optimistic this week

  
Analysis, Forex
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The European Central Bank meet this week, preview below.

  • Meeting Thursday 16 July 2020
  • Policy announcement at 1145GMT (policy likely unchanged)
Euro forecast via Danske (this from late last week):
  • We remain constructive and expect the broad USD to decline over the coming months
  • 3 month forecast is 1.15
On the upcoming ECB policy meeting
  • we expect a repetition of recent comments from various governing council members, thereby striking a cautiously optimistic tone compared to the June projections. 
  • We also expect they may decide not to use the EUR1,350bn PEPP envelope in full. 
  • No new initiatives are expected next week
  • Markets may not be prepared for a ‘less dovish’ message
  • with abundant liquidity, PEPP and APP still ongoing
  • Our key expectation is that the ECB will reiterate its stance towards supporting a recovery, with, not least, a focus on sovereign spreads. 
For spot FX,
  • the direction and stance of the ECB and euro area fiscal politics are, in our view, quite well priced and communicated (though to a lesser extent when it comes to the outcome for Brexit). In turn, it will be the breath and speed of the global recovery that sets the tone in EUR/USD, and mostly through the USD leg

European Central Bank preview

The two major risk factors in markets for 2019 will still be there in 2020

  
  Analysis
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US-China trade and Brexit worries will not go away despite some improvement in their respective rhetoric at the moment

We’re getting closer to a Phase One trade deal and Boris Johnson just won big in the UK election last week. Two of the biggest risk factors that has plagued markets this year appear to be finding some form of conclusion, but are they really?

US-China trade war

US-China
As great as the Phase One trade deal is and will be, it isn’t the “be all, end all” deal that will see US-China relations significantly improve.
This is merely a temporary ceasefire at best and at worst, it’s just a delusion to keep some hope that both sides are not yet ready to engage in a full-blown trade and geopolitical war.
The Phase One deal will include tariffs rollback by the US in exchange for China purchasing more farm products – to try and reach $40 to $50 billion annually – as well as some “firm” commitments on technology transfer, currency and opening up of its economy.
The catch here is that it will include some subjective way of determining how both sides will live up to their respective end of the deal. That tells me that ultimately, this will eventually lead to either one of them calling the other out when the time is right.
As such, don’t expect the hostilities and trade worries to die down just because the Phase One deal has been signed – if it even does that is. This is a worry that will haunt markets for many more years to come and 2019 is but a taste of what it can be like.

Brexit

Boris Brexit
Boris Johnson got his much sought after majority in parliament – quite comfortably as a matter of fact – and now he can get his Brexit deal across the finish line. Easy-peasy.
Sadly, this is just merely the starting point in the whole Brexit process.
Once Johnson gets his deal through the legislative hurdles in parliament in January next year, he will have to then go on to negotiate a future trade relationship with the EU.
And for the uninformed, they will only have until the end of next year to finalise a deal and to try and implement it thereafter. Otherwise, the UK will leave the EU without a deal.
Yes, a no-deal Brexit is still on the table as long as the UK and EU cannot agree to a trade deal during the transition period next year.
That can still be avoided though if the UK requests an extension to the transition period before July next year. However, Johnson has categorically ruled that out repeatedly over the past two months in what looks to be a gambit to pressure EU leaders during talks.
We’ll see how all of that plays out but it is clear as day that both sides won’t get a deal done before 31 December 2020. That is all but a pipe dream.
As such, we will have to see if Johnson will find it sensible to negotiate further in the coming years – prolonging the Brexit uncertainty – or opt to crash out of the EU without a deal, wasting all the time we have spent extending the Brexit deadline since March.

FT reports that the EU may give the derivatives industry and extension on Brexit

  
  Analysis
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Financial Times says the European Union is readying moves to offer an extra year to the financial derivates industry to prepare for Brexit

  • Valdis Dombrovskis, vice-president of the European Commission, said on Friday that contingency plans for accessing UK-based clearing houses would have to be extended beyond the current March 2020 end date because the EU financial services industry would not have alternatives in place in time.
That’s the in a nutshell version of the report – here is the link for more (FT may be gated)

Moodys Downgrades UK Outlook To Negative On “Brexit Paralysis”

  
Analysis, Economy
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Moody’s downgraded its outlook on Britain’s debt (currently rated Aa2) to negative from stable after the market close on Friday, saying Brexit had been a catalyst for an erosion in the country’s institutional strength, perceived “material deterioration” in UK governance, and that the country’s ability to set policy has weakened in the Brexit era along with its commitment to fiscal discipline.

The outlook cut represents a catch down to its competitors: the UK is currently rated AA by S&P and AA- at Fitch Ratings, with both companies having the UK on negative watch.

“It would be optimistic to assume that the previously cohesive, predictable approach to legislation and policymaking in the UK will return once Brexit is no longer a contentious issue, however that is achieved,” the ratings agency said adding that “the increasing inertia and, at times, paralysis that has characterized the Brexit-era policymaking process has illustrated how the capability and predictability that has traditionally distinguished the U.K.’s institutional framework has diminished.”

“The decline in institutional strength appears to Moody’s to be structural in nature and likely to survive Brexit given the deep divisions within society and the country’s political landscape,” Moody’s added.

The decision to put the UK on negative outlook even as Moody’s affirmed Britain’s Aa2 long-term issuer and senior unsecured ratings comes one month before an election that is likely to determine the future of Brexit. While the election will have a big impact on Brexit, this week has seen both sides escalate their spending pledges, drawing election battle lines with plans to end a decade of U.K. austerity. (more…)

Carney press conference after BoE remains on hold

  
  Analysis
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Mark Carney

  • Recent Brexit deal creates a possibility of a pick up in UK growth
  • World risks slipping into low growth, low inflation but many of these dynamics occurred first in the UK
  • Both reduced Brexit uncertainty and stronger world economy assumed in BoE forecasts, but neither is assured
  • Now evidence that households are doing precautionary saving before Brexit
  • Brexit uncertainties are weighing particularly heavily on business investment
  • Reduced chance of a no -deal Brexit has pushed up sterling
  • Brexit agreement reduces risk of no deal significantly
  • pick up in UK growth likely to be limited by a lack of supply capacity in the economy
  • New BoE Brexit assumptions assume transition occurs over 3 years vs previous much longer transition.
GBPUSD pushing down towards 1.2800, but that level is holding for now

Is there still a possibility of a no-deal Brexit at this stage?

  
  Analysis
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What if I told you that a no-deal Brexit now hinges on Boris Johnson winning the parliamentary vote tomorrow?

Boris Johnson
Before we get into the thick of things, let us set out what exactly is at stake tomorrow. Clearly, Boris Johnson’s Brexit deal motion is the main event but what does it mean really?

If lawmakers do vote to pass the motion, it means that they have technically voted in favour of a Brexit deal but there is still the issue of ratification and getting Johnson’s deal through the necessary legislative hoops – that includes voting on the withdrawal agreement.
The issue with all of this is related to the Benn Act. Now, the Benn Act requires Johnson to request an extension if Johnson cannot get parliament to agree on a Brexit deal. Hence, if the deal is rejected tomorrow, then there is no issue.
However, if the deal is approved, this is where things may yet get a little tricky.
In such an event, Johnson isn’t compelled to seek an extension and if there are hurdles he cannot overcome in getting his deal to be ratified and implemented, he could just let things run its course and we get towards a no-deal Brexit after 31 October.
Logically, you would think that he would seek a technical extension to get a deal through but possibly and certainly are two different words with very distinct connotations.
He could possibly seek an extension to work out any potential legislative issues and buy enough time to get his deal over the line legally but it doesn’t mean that he will certainly do so.

Is there any way to avoid this altogether?

This is where the vote on the Letwin amendment tomorrow may be rather consequential.
The Letwin amendment sets out that the government is to request an extension of the Brexit deadline, if a deal is passed, up until all the necessary legislative hurdles are overcome to officially put such a deal into place.
In essence, it is an added insurance in case Johnson has other plans up his sleeve.
This means that even if Johnson’s vote passes tomorrow but fails to get through any potential legislative complications by 31 October, he will still be compelled to request for an extension to the Brexit deadline.
While the drama involved in all of this is certainly captivating, it must be said that if we do see Johnson’s deal being passed tomorrow, it is pretty much a given that it should make it through all the significant legislative hurdles and be ratified in due time.
The timeline may now say it should be done by 31 October (two weeks) and that certainly could be plausible if lawmakers decide to work overtime.
That said, even if that isn’t enough time, a technical extension just to get the deal implemented is almost surely the most likely outcome – barring any unforeseen circumstances.

What happens now that Boris Johnson has managed to strike a Brexit deal?

  
  Analysis
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We have been down this road before

Johnson

A Brexit deal is only as good as its chances to pass a vote in parliament. Just ask Theresa May how that worked out for her.

For all the optimism we’re seeing in the pound over the past week, all of that now hinges on whether or not Boris Johnson can get this deal through a parliamentary vote.
So, what are the key signs to watch for that?
The most obvious telltale sign is to watch for the stance adopted by the DUP. Just be reminded that Johnson doesn’t have a working majority in parliament so he will need all the support he can get at this point in time.
As it stands, the DUP isn’t quite on board yet so that means there is still a high chance of the deal failing to get through a vote in parliament.
What would that mean if we see such a scenario? Again, it just puts us back to a similar position when Theresa May was trying to get her Brexit deal through a vote – where she failed three times by the way.
Another possibility is if Johnson decides to couple his deal with a referendum vote in order to sway Labour lawmakers to get on his side. But that is likely a long shot and one he is almost certainly not going to pursue.
Otherwise, I still reckon it is a tall order for this Brexit deal to pass a vote in parliament at this juncture. But if the DUP and ERG gets on board, I think the pound has the potential to first head towards 1.33 before looking towards 1.35 next.
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