The Week: Is Brexit in the price?

Markets were stable in the face of political turmoil in the UK this week. Does this suggest that Brexit - in all its forms - is in the price?

  • Sterling and the FTSE were stable during this week's political upheaval
  • The market seems to care about two things: a Corbyn government and China
  • As it stands, China remains the far greater risk

It became clear this week that markets don't care very much about Brexit. During all the machinations with the government, from a withdrawal bill defeat to a confidence vote, sterling was pretty stable. It did not 'plunge' or 'soar' as the headline writers would have liked, but instead stayed at a reasonably stable level against both the Euro and the Dollar.

At the same time, the FTSE All Share barely registered a fall. Does this suggest a 'no deal' is in the price? It either suggests that markets don't believe a no deal is very likely - which would seem optimistic given the current paralysis in parliament - or that share prices reflect the potential disruption.

This begs the question of where the risks lie in markets. If the market isn't particulatly worried about Brexit, what is it worried about? It seems clear that the market is worried about two things: a Corbyn government and China.

I may be forced to eat my words, but it seems that the likelihood of a Corbyn government is receding. A recent YouGov opinion poll put Labour six points behind the Conservatives. Corbyn's backbenchers are growing increasingly restless with his lack of leadership. The public isn't convinced by his chaotic position on Brexit and his refusal to engage in cross-party Brexit talks looks peevish. Corbyn's hope may have been to allow the Conservatives to do the dirty work of leaving the EU before seizing power and implementing a fiscal package that would never have been allowed under EU rules, but that looks like an increasingly vain hope.

The market recognises this and this has helped support the pound amid the turmoil of the recent days. Should this picture hangem expect markets to react very poorly. Higher wealth taxes, corporate taxes and blowing all pretence at fiscal restraint would be greeted with horror.

China is the other big factor. It is undoubtedly slowing. A variety of data points are all pointing to weaker growth. The government has announced some limited stimulus packages, but will be wary of allowing debt to blow out again after its recent efforts to rein it in. As it stands, the market would probably be happy if they could see some stabilisation, or some resloution in the trade war. However, the US trade deficit with China grew again last year. All this drama, it appears, may have been for nothing.