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Plethora of Brexit scenarios possible as event fatigue descends on markets

Publication Date: 19 Mar 2019 - By ReachX Team By ReachX Team
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Macro FX & Rates Investment Strategies Multi Asset EU ex-UK UK

With Brexit fatigue setting in on the seemingly never ending saga of the UK’s exit from the European Union, Robert Bergqvist, chief economist, and Richard Falkenhäll, senior FX strategist at Nordic bank SEB, explore various aspects in a holistic Q&A.

Both conclude that major efforts may well be under way on both sides of the English Channel to avoid a no-deal Brexit, but the UK is – and will remain – a divided country for a long time to come, regardless of the outcome. This is politically and economically worrying, not only for the British people, but also for the EU and the world, the commentators add.

SEB puts the probabilities of the various Brexit outcomes as follows:

What happens if MPs reject the agreement the third time (should it return to parliament)?

• If MPs vote No, which is very likely, the UK government is expected to request a lengthy extension of the withdrawal period. It is hard to say how long this extension might be, but a reasonable guess is until the end of 2019, but perhaps even longer. This is because Theresa May and her government will be forced to realise that the strategy they have used since 2016 is not working. They must simply re-assess their entire Brexit model and devise a new strategy that Parliament can accept.

What paths can Prime Minister Theresa May and the UK Parliament choose?

• More and more MPs have argued that UK Parliament should be allowed to hold indicative votes to test all conceivable Brexit alternatives, for example remaining in the customs union or perhaps cancelling the UK’s withdrawal request
• PM Theresa May has also previously announced that she intends to step down this summer, and it is entirely possible that she will take the UK government with her. If so, the UK will hold a snap election later this year
• Given a new British political leadership, withdrawal negotiations with the EU could resume, based on the current agreement. But assuming such a series of events, putting an agreement in place will require more time – probably a lot more time. 

What are the economic and financial market effects of what is now happening in the UK?

• Although financial markets have been highly turbulent in recent weeks, the pound has appreciated and British bond yields have climbed a bit. The reason is that market players believe the risk of a hard Brexit has fallen. If the UK government loses the next parliamentary vote, this may still result in a strong pound if the withdrawal period is extended
• Q4 2018 growth was weak, and business investments fell in the past four quarters. We also expect a listless start to this year, and the British government recently cut its 2019 growth forecast from 1.6% to 1.2%
• The UK is a key trading partner of several EU countries. If the British nevertheless choose to leave the EU with no deal, this will probably be reflected by weaker growth in various EU countries over the next few years, while also adversely affecting global financial markets and risk appetite.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

ReachX Team

 

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