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Deal, but no cigar

November 2018

We have a deal on Brexit, but it appears to have resolved little about the future EU/UK relationship. It’s likely to be business as usual for UK assets

  • The Brexit deal may have been tentatively welcomed by investors, but it has many hurdles
  • As is usual, the currency took the strain
  • Brexit uncertainty may continue for decades

So we’ve got a deal. As was inevitable, it is a deal that pleases no-one and Prime Minister May must now convince everyone that it is better than any alternative. Certainly, the alternatives – a no-deal Brexit, or going back to the country for a second referendum – are both risky options, albeit for different reasons. 

Once again, the currency took the strain. It rose a little, but then investors seemed to realise that a deal was not the end. It was barely even the beginning. In fact, there will be no Brexit ‘outcome’, just an immensely long and drawn-out renegotiation of our relationship with Europe that will probably have no end point. It is difficult to see any significant spike in the currency in the near-term. Were it to happen, it could reverse the spike in inflation since the June 2016 Referendum and this may help keep rates lower, but the Bank of England is likely to ‘look through’ these effects.  

Today, currency traders are watching nervously as the resignations mount. At the time of writing, just Dominic Raab has gone, but it’s difficult to know how many more will have followed by the time of publication. 

The FTSE 100 has dipped, presumably on currency considerations, while bond yields have dipped around 6% today. Most believe that the process could ultimately lead to a rise in UK sovereign bond yields, as the risk of a no-deal Brexit is removed. However, the ‘no deal’ scenario is still very much live and given that there remain plenty of other short-term risks, the impact is likely to be minimal. 

The solution on all sides is to defer. The transition deal leaves plenty of room for future negotiations. It is difficult to see how solutions to the problem could miraculously present themselves, but it leaves the UK closely aligned with the EU until at least December 2020, and puts off any Armageddon scenario a little longer. 

For currency, equity and bond markets, this is likely to mean business as usual. Investors are likely to continue their general disdain for UK equities. The currency is unlikely to shift significantly and bond yields will remain relatively low. The volatility continues until investors decide that Brexit uncertainty is going to be a factor not for the next 2-3 years, but possibly for the next decade and beyond.

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