Rory Smith

Market Commentary

For the week ending 13 July 2018
Report by Rory Smith
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Rory Smith

An intriguing and captivating week in the UK started with the resignation of two senior Cabinet Ministers and concluded with a visit by President Trump. Sandwiched in the middle was England’s elimination from the FIFA World Cup, where a youthful squad had exceeded expectations and raised the Nation’s spirits by reaching the semi-finals, and the UK Government releasing the long-awaited White Paper outlining its proposal for the future relationship between the UK and EU.

The resignations of David Davies and Boris Johnson raised the political temperature again in the UK, and reignited questions about the possibility of a leadership challenge to Theresa May. Both resigned following last week’s ‘productive discussions’ on the so-called soft Brexit compromise deal, which, on reflection, neither felt they could support. Whilst it has galvanised the pro-Brexiteers in the Conservative Party, at the time of writing it looks like the appetite for a leadership challenge is limited, given the process would take two months, wasting valuable time to negotiate with the EU, and the potential that it could result in an early general election.

The Brexit White Paper proposal has provided more detail on what type of trading partnership the UK wants with the EU. It has been described as a soft Brexit blueprint, which keeps the UK closely tied to the EU via a free-trade area and identical regulations for certain industries. Under the proposal, there will be a looser relationship between both parties on services (could be a sticking point in the discussions with the EU) and a complex plan to keep Britain in the EU’s customs territory (to address the Irish border question).

Focus will now move onto the EU, and its response to this White Paper. Push back may also come from within the UK parliament if the EU does seek out additional concessions for this proposal. Nonetheless, what we do finally have is a proposal against which negotiations and discussions can advance, which is a welcome development. That said, the risk of ‘no deal’ remains, and parliament will have to approve the final deal. Clearly, there is much to be done by both the UK and the EU if they are to finalise plans by the end of the year.

Neither the Cabinet resignations nor the release of the White Paper had any meaningful impact on UK asset prices, which have continued to be influenced by developments on the trade front (covered in last week’s Market Commentary). This is likely to remain the more dominant market driver during the remaining summer months, with the impending start of the US corporate earnings season likely to offer some insight as to whether US companies expect tariffs to have any impact on their business operations or end demand.