Brexit has been firmly on the market’s radar since the June 2016 Referendum, and this week was no exception. However, there was one notable difference compared to the previous attention the matter has received: there actually appeared to be some progress to discuss, rather than the usual posturing and rhetoric we have become so accustomed to.
On Tuesday evening, multiple sources reported that British and EU negotiators had managed to reach a deal over the so called “divorce bill”, citing several diplomats familiar with the talks. The figure touted by the sources unsurprisingly seemed to fit neatly between the €20billion and €60billion opening positions of the UK and the EU. The Telegraph reported a net final figure in the €45billion to €55billion range, while The Financial Times said the UK hopes to pay “less than half” of the €100billion gross figure. We may be more likely to see an agreed methodology for calculating liabilities, rather than any single figure as reported, though it would appear that the two sides are at least getting closer together.
While the level of financial settlement has been a significant sticking point, there is still much to be done. Prime Minister Theresa May is yet to satisfy the EU that “sufficient progress” has been made in the withdrawal talks, an EU requirement before discussion on trade can begin. Most obviously, the contentious issue of the Northern/Republic of Ireland border remains outstanding. Both the Irish Government and the Democratic Unionist Party are intent on avoiding a “hard border”, however, there remains a gulf between how they define this. If this issue cannot be bridged by next week, the European Council meeting on 15 December will no longer be a viable time to open trade talks.
Despite the uncertainty remaining, and the sources behind the headlines being unnamed, the market immediately bought the rumour without worrying about the detail. Sterling bounced on Tuesday’s headlines and continued to strengthen over the course of the week. At the time of writing, the currency is 2.1% higher against the US Dollar versus where it traded prior to the reports, and is up 1.8% against the Euro.
Sterling was not the only currency hitting the headlines this week, with Bitcoin having been on a journey that makes the Pound’s rise look very pedestrian. On Wednesday alone, the cryptocurrency rallied 15% intraday to hit a new all-time high, plummeted 21% off that level, and then rallied back to close 2.5% higher on the day. Clearly the market is being driven by speculators looking to generate a quick return. But is this a bubble, or could it be an inevitable rise as cryptocurrency moves into the mainstream? Whatever your position, the volatility highlights that investors would be wise to “do their homework”, as advised by Sir Jon Cunliffe, the Bank of England’s Deputy Governor for financial stability. However, with no way to define fair value, it is a homework task that is difficult to begin.