Nolan Stanton

Market Commentary

For the week ending 31 August 2018
Report by Nolan Stanton
Back to Latest
Nolan Stanton

In case you hadn’t noticed we have a mere seven months until the scheduled date for the UK to formally leave the European Union (EU) on 29 March 2019, and four months until the end of the year, by which point we should be starting to see clearly if the UK is going to face a soft or hard Brexit. Over this period, the UK Government will either have to strike a deal with the EU on the three key divorce issues (how much the UK owes the EU, what happens to the Northern Ireland border and what happens to UK citizens living in the EU and those EU citizens living in the UK), or walk away from the negotiating table. Once this has happened either successfully or otherwise, it is over to the UK Parliament to have a vote on whether or not they accept what the Government has negotiated with Brussels. This was what Gina Miller won in the Supreme Court and the minority Government hoped to avoid. Of course Parliament could reject whatever is put in front of them. This could trigger a general election or overwhelming calls for a second referendum. You can bet it will trigger considerable uncertainty for the UK economy, gilt market and Pound.

The so called “Chequers plan”, which prompted ministerial resignations, is/was intended to see the UK leave on “soft” Brexit terms, which remains possible, but it is not the only outcome that could emerge. The political season kicks off in earnest next week as Parliament returns from its recess. The UK Government over the summer, has already said any deal with the EU may fail to be struck before the end of October deadline, pushing it back until possibly mid-December, when the next EU Summit is scheduled. Whatever is agreed with the EU and UK still needs to be ratified by the European Parliament and be ‘signed off’ by the remaining 27 EU members. If you sense this is likely to go down to the wire, you would be right.

Betting markets are very sympathetic to this view with a majority at present favouring a “no-deal” Brexit. Intriguingly, the second referendum odds are 3:1 ‘no’. Although it is true that Sterling has come under renewed pressure against the Euro until this past week, and market data shows speculative players moving against the currency, other indicators of risk sentiment suggest that stress levels remain quite some way off the extremes reached in the summer of 2016. This is odd given the uncertainties faced by the UK between now and next April. Headlines this past Wednesday saw Sterling rally as Michel Barnier said the UK would be offered a ‘unique deal’, but closer perusal of his remarks reiterated that this would not be the “a la carte” desired Brexit favoured by the UK Government. To wit, the only rationale forecast that can be made at this time, is we are certain of more uncertainty and expect the value of Sterling on foreign exchanges to reflect sentiment positively and negatively in this regard.