Market News & Insights
5 September 2018

The Brexit Merry-Go-Round

With Parliament back in full swing this week, and the Brexit deadline only 205 days away, we have a renewed sense of urgency. Unfortunately this renewed focused still has the same ghosts of the past with the Conservative party showing no sign of unity, while EU leaders and Barnier continue their unapproving rhetoric on what’s been presented to date. May’s c plan to keep the UK in the single market for goods was quashed by both sides. Boris Johnson stated the Chequers proposals left Britain with “two-thirds of diddly squat”, while Barnier has criticised the proposal for its cherry picking approach. The reality of the situation is quite bleak, as even if we do manage to get an Article 50 deal agreed between Britain and the EU, will May actually be able to pass it through the House of Commons? David Davis has already promised to vote against a Chequers-based Brexit deal while Boris is plotting a major rally at next month’s Conservative Party conference. We have just learned that Theresa May is expected to make a surprise statement to MPs today, with no details given on the subject matter.

According to estimates, a trade agreement under a WTO agreement would see the UK’s output reduced by up to 10 percent. BOE Chief Economist Andy Haldane stated that markets see about a one in four chance of no exit deal. If this is the case the pound is certainly open to further downside risk the longer a no deal remains on the table, with the next 6 weeks pivotal for sterling. The pound opened above .90 and the .9040 area will provide some resistance to the topside. GBPUSD has found some support just above the 1.28 level and a break below here would see cable retarget the 1.2660 lows.

Emerging markets continue to capture attention. Equities in Asia closed lower overnight and the increase in fear has followed into the European opening with all major European bourse showing red losses on my screen this morning. The heightened risk environment has seen the dollar in demand, strengthening for a fifth session in a row. Countries such as Turkey and Argentina initially lead the escalating EM situation but the likes of the Philippines, Malaysia and South Africa to name just a few have also been dragged in. The rising dollar in response has a potentially snow balling effect, creating higher interest costs for these nations that typically issue US Dollar denominated debt. The dollar is rising across the board with both majors of EURUSD and GBPUSD lower too. EURUSD is back testing lows again at 1.1542.