UK uncertainty takes a new twist

Wednesday, 11th July 2018 09:46 - by Shant

Last week's Brexit proposals agreed at the cabinet meeting at Chequers were all the talk at the end over the weekend, and based on the price action on the currency at least, were received relatively well by the markets.  It was however, naive to think that there would be no backlash from the proposals which were agreed - and seemingly agreed under duress. 

Taking a unified stance against Europe must have been one of the PM's priorities in constructing the latest White Paper which is to be presented to the EU this week, and one which makes concessions on goods and agricultural products, while keeping the much coveted services industry under the control of the UK.  Expect EU opposition this.  Indeed, officials in Germany have already voiced their discontent to the plans. 

As we saw on Monday, Brexit secretary Davis was the first to resign, followed by 2 junior ministers thereafter, but it was not until the Foreign minister Boris Johnson announced his departure that the mood turned sour.  Naturally, assumptions of a power struggle and confidence vote circulated the market with the colourful Johnson seen harbouring aspirations for taking over the top job.  

Cue the cavalry, including of all names Jacob Rees Mogg, to give the PM some backing -  if you can call it that - to deny any claims in calling for her resignation. Michael Gove has also denied any intentions of resigning, and this lets the dust settle in parliament for now.  Despite this, the sword of Damocles is hanging over Theresa May's head.  Indecision, lack of firm leadership and empty promises are but some criticisms levelled at her, and the exit of some key members of the cabinet effectively leave them free to contest for 10 Downing Street.  This is the fear, and ultimately the key risk for UK assets, interest rates and of course Sterling. 

Under the current government composition though, the market may start to align with the possibility of a softer Brexit, but in this viewpoint lies a prolonged period of uncertainty, something which will continue to hamper investment, both domestically and foreign. 

Clearly some of the warnings from large UK based corporates have had an impact, and the PM, and indeed Brexiteers have and would do well to heed the warnings.  True the public voted to leave Europe, but there is a growing mood that leaving the EU does not mean making an enemy of them.  This will require a level of reciprocation from the continent, and should Michel Barnier et al dismiss the latest proposals out of hand, we may start to see a little empathy developing towards the UK stance.  No deal is not something either side want, though the disruption within the UK government have prompted fears from Brussels that such an outcome is ever more probable.  Even so, the latest UK plans on closer alignment with customs union and rules on consumables are a small, very small step towards a potential agreement.  

Given a history of drawn out negotiations with its major trading partners - Canada among them (CETA took over 7 years to complete from inception) - it remains optimistic to expect a trade agreement between the UK and EU to be concluded by the end of the transition period at the end of 2020.  The composition of 27 member states all vying for their national interests clearly provides obstacles for all to see, but with German exports to the UK accounting for some Euro85-90bln and significantly less than half going the other way, some of the big names (in Germany) are calling for leniency towards Britain.  We have already mentioned above, the impact and sway of business over political decision making. 

Politically, the PM may have won a small battle in getting some form of agreement at Chequers last week, albeit with notable casualties.  However, more importantly, she has also put the ball in the EU's court, something which may work in the UK's favour.  Even in times of heightened stress and worry, we saw Sterling taking a sharp turn for the worse, though this only improved the competitiveness of UK exports - and they duly rose.  As trade tensions between Europe and the US mount, the vulnerability of the UK is somewhat tempered, though at this stage we will desist from mentioning the special (UK) relationship with the US - but it's there for now.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.