What's the chance that UK doesn't Brexit after all?
Nordea says it's 30%
Analysts from Nordea on scenarios after the Brexit referendum:
Q4 2016, the new prime minister triggers Article 50 of the EU Treaty by
notifying the EU that the UK intends to leave. That opens a two-year
window for negotiating a withdrawal agreement. But it seems unlikely
that the ultimate relationship between the UK and the EU will be agreed
within the two-year timeframe.
Background: Last week PM Cameron
said he would step down in the autumn and leave it to the next prime
minister to decide when to notify the EU about the intention to leave. A
likely leadership battle within the Conservative Party could delay the
government's invoking Article 50. Moreover, the new PM and his cabinet
will need time to come up with a coherent plan for the future
relationship with the EU (no such plan exists at this point). This could
postpone the notification until early 2017, a risk which would be
aggravated in case of an early general election in the autumn.
EU referendum was advisory and non-binding. Thus, the UK's next prime
minister is under no legal compulsion to act on the result. A new
premier could, in theory, go back to the EU and ask to negotiate a new
deal before taking it back for a second vote. But this option has been
ruled out by EU leaders. Moreover, it would be very difficult to ignore
the views of the 17.4 million people who voted to leave. Thus, the
minimum requirement would probably be a general election victory for a
party that had promised explicitly to think again.
Scenario 1: Brexit and free trade agreement (70% probability)
EU leaders are pressing the UK to move quickly, only the UK can decide
when to invoke Article 50. In other words, the EU cannot force the UK to
]The UK will try to negotiate a tailor-made free trade
agreement (FTA) with the EU. Due to the mutual economic dependency
between the UK and the EU, the UK will eventually, after several years
of negotiations, end up with a deal which ensures continued access to
the EU internal market, including services. But UK companies, including
financial institutions, will get somewhat less access than they have
today. But for an extended period after the notification it will remain
very unclear for financial market participants what type of post-exit
arrangement (Norway/EEA model, Swiss, Canada etc) the UK will end up
with. If the two-year negotiation period comes to an end with no deal,
it can only be extended by a unanimous decision of the other 27 EU
countries. If there is neither a deal nor an extension, the UK leaves
automatically and trades with the EU countries on WTO rules. Any EU deal
with the UK must be approved by a qualified majority of 65% of member
Scenario 2: No Brexit, return to status quo (30% probability)
assign a probability of 30% to the following political risk scenario:
Brexit will never happen - the UK will never trigger Article 50.
Background: Due to adverse developments in financial markets and the
economy plus mounting concerns about a dismantling of the UK, the new PM
and his cabinet will have second thoughts about the commitment to
accept the EU referendum. This could trigger a Brexit vote in Parliament
or a general election, in which the government advocates a
renegotiation with the EU. The longer Article 50 is put off, the greater
the chance it will never be triggered. With a delay in triggering
Article 50 to the end of this year, or possibly longer, the anti-Brexit
movement within Parliament is likely to gain ground. Ahead of the Brexit
vote, the majority of MPs favoured staying in the EU.
Brexit - British businesses launch legal challenge to Brexit
A legal challenge has been launched arguing the government would be
violating parliamentary sovereignty if it activated Article 50 on its
The argument goes that doing so would render redundant
rights established by the European Communities Act of 1972 .... in a
nutshell, parliament gets to make this decision, not the prime minister
a lawyer from the firm representing the businesses: "The result of the
referendum is not in doubt, but we need a process that follows UK law to
enact it. Article 50 simply cannot be invoked without a full debate and
vote in parliament."
London Law Firm Says Brexit Can’t Happen Without Parliament Vote
Mishcon de Reya, one of London’s biggest law firms, said it’s
representing a group of unidentified clients threatening to take legal
action against the British government if it tries to initiate the
process of leaving the European Union without consulting parliament.
formal start to Brexit talks is likely to be the triggering of Article
50 of the Lisbon Treaty. Mishcon de Reya said in a statement that this
process can only be started with parliament’s consent. The U.K.
government’s position is that it’s a decision for whoever is prime
minister after David Cameron tendered his resignation.
“The result of the referendum is not in doubt, but we need a process
that follows U.K. law to enact it,” Kasra Nouroozi, a partner at the
firm, said in an e-mailed statement. “Everyone in Britain needs the
government to apply the correct constitutional process and allow
parliament to fulfill its democratic duty, which is to take into account
the results of the referendum along with other factors and make the
which said it is acting on behalf of a currently anonymous group of
concerned clients, has retained David Pannick, Tom Hickman, Rhodri
Thompson and Anneli Howard to act in the matter. The law firm said it
has been in touch with government lawyers since June 27 to “seek
assurances that the government will uphold the U.K. constitution and
protect the sovereignty of parliament in invoking Article 50.”
Fiscal policy to play bigger role post-Brexit - G20 official
Plenty of talking heads at the G20, this comment from an unidentified official, via Reuters:
think fiscal policy will play a bigger role in the wake of Brexit even
though it's up to individual countries to decide which of the
three-pronged policy tools should be utilised," said the official.
increased role for fiscal policy was one of the goals of the meeting,
whether there is more to it than just words remains to be seen.
U.S. Treasury Secretary Jack Lew said
commitments by G20 members to refrain from competitive currency
devaluations have helped sustain economic confidence. Lew was meeting
with Japanese finance minister Aso
Not only do we forecast a large increase in the yield of
10-year Treasury bonds, but we also expect the US dollar to appreciate
as central banks elsewhere loosen policy further. A strong dollar may
weigh on US equities, but we expect a weaker yen to ensure those in
Japan outperform. Emerging markets could be shaken, too. But we think
they are not as vulnerable as in the past, and should benefit from
stable commodity prices.
Early indications suggest that the vote for Brexit is having a
material impact on the UK economy, but little effect on the rest of
Europe. The fallout further afield should be minimal. For the world's
largest economies, including the US, China and Japan, the UK accounts
for only a small share of exports and foreign direct investment.
Moreover, the impact of the Brexit vote on investor confidence
has been small and short-lived. In particular, world equity markets are
back above their pre-referendum levels and well above their February
Prospects for advanced economies should be driven by more
fundamental and global forces than the UK referendum. Most importantly,
private consumption should continue expanding at a reasonable pace.
Household debt burdens have fallen in recent years, employment is likely to rise steadily in most economies, and wage inflation should pick up in some economies, notably the US.
Fiscal policy is providing a small boost to demand this year. In some
countries, policymakers have eased up on austerity and in others they
have actively loosened policy. Official forecasts are for fiscal policy
in advanced economies to be tightened again in the coming years, but
governments in Japan and the UK have said that they may scale back these
Inflation is still well below target almost everywhere because
the past fall in energy prices is affecting the year-on-year inflation
rate. The rebound in oil prices since January remains small compared to
the collapse in oil prices in late-2014.
However, headline inflation is likely to rebound by early next year
in advanced economies as the previous slump in energy prices drops out
of the annual comparison. Price pressures should rise most in the US
where the economy is approaching full employment. Meanwhile, the 10%
fall in the trade-weighted value of sterling since the referendum is
likely to push inflation up in the UK during the coming months. Indeed,
headline inflation may be close to 3% in both countries in the coming
In contrast, although headline inflation is also likely to rise
in the euro-zone and Japan, underlying inflation should remain much
lower. This in turn will probably prompt central banks in the euro-zone
and Japan to ramp up their asset purchase programs further in the coming
Much of the slowdown in global growth since 2010 has been due
to the weakness of emerging economies. The growth rate of emerging
economies, in aggregate, is likely to be more stable in the coming
years, but remain well below its pre-crisis rate.
Several commodity producers, including Brazil and Russia, are
coming out of recession, so will no longer be a drag on EM growth, and
India should continue growing at a decent pace. Moreover, our in-house
China Activity Proxy suggests that China's growth rate has now
stabilized, thanks to fresh policy stimulus. In the immediate future, we
think China's growth rate is more likely to accelerate than to slow
sharply. That said, the build-up of corporate debt poses significant
risks to China in the medium term.
To understand Brexit trading you need to understand the difference between perception and reality
With the pound moving on virtually every UK economic indicator, it's never been more important to know how to interpret the data
The CBI data looks bad but what does it really tell us?
this is a reaction from businesses. They are the first to react to big
events as they have potentially large outlays for stock. If they get
worried they won't order as much for fear they won't be able to sell it
on, and so we see a slump in wholesale orders.
the data isn't necessarily indicative of actual retail activity from
shoppers. Looking more closely at the CBI report sub-sectors, grocers,
furniture and carpets sales volumes dropped 30% & 90% respectively,
while non-specialised goods, foot wear and leather rose 52% and 44%.
Internet sales were still up 23% even though it was lower than June's
38%. Folks were still buying cars as the balance of +21% shows.
let's acknowledge that the data isn't good for the economy because any
slowdown along any part of the chain isn't good. However, the real
news will come from actual retail sales and whether they've slumped or
not. If they hold up, when we get the first decent post-vote look 18th
Aug, then these suppliers might change their tune that things might not
be as bad as they thought.
A lot of the early Brexit
fallout is going to show in sentiment before it shows in actual hard
numbers. That can often be a self fulfilling prophecy if the sentiment
is way too negative that it causes ripples all the way through the
economy. I'm not saying the UK isn't going to suffer nor will it brush
Brexit off but if you're trading the pound through this you have to
understand the different points and times when the data risk means
something real has happened or whether people think that something's is
going to happen.
At the end of the day the market is a
simple creature and is going to move on the data depending on whether
it's good or bad, irrespective of what it really means for the future of
the economy. Trade the numbers short-term by all means but if we want
to trade further out than the ends of our noses, we need to really
understand what the data is telling us as that will give us a potential
insight into what the UK government or BOE may do in the future, and
that's where the biggest moves and trends will happen.
IMM Report: Brexit Bears Boost GBP Short Position To A Record High
Data in this report cover up to Tuesday July 26 & were released Friday July 29.
Speculative sentiment has been leaning more USD-bullish and EUR and
GBP-bearish in recent weeks and that trend extended a little further in
the latest CFTC positioning data for the week through July 26th. The
aggregate bull bet on the USD (versus the major currencies) rose to
total USD14.8bn this week, the biggest punt on USD appreciation since
Investors added to net EUR shorts by a significant USD1.7bn in the
week – taking the net short to the highest level since January
(USD15.5bn or the equivalent of 112k contracts). The net short here is
substantial but remains well below the all-time peak of -183k contracts
(Dec 2015), however. Net
GBP shorts rose more than USD500mn this week to total USD6.6bn. This is
the market’s second largest net position after the EUR and takes the
overall GBP net short to a new, all time record (just over 80k
contracts). Crowded positions are vulnerable to a squeeze but we suspect
speculative accounts will continue to pressure the GBP ahead of
anticipated BoE easing measures next week.
In other markets, investors pared net long JPY (still sizeable) and
CHF positions, reducing ‘safe-haven” bets, and cut net AUD and NZD
longs. Investors continue, however, to add, if only marginally (USD63mn)
this week, to net CAD longs (gross longs are adding while gross shorts
have been reduced in recent weeks) in defiance of the continued (through
Tuesday) erosion in the CAD.
UK manufacturers face a rapid slowdown in economic activity after the
EU referendum in favor of Brexit undermined business and consumer
IHS Markit's PMI in manufacturing fell to 48.2 in July, confirming the negative reading from the flash estimate from July 22, the report from IHS/Markit showed on Monday.
final PMI came in at 48.2, down from the earlier flash print of 49.1.
The pace of contraction was the fastest since early-2013 amid
increasingly widespread reports that business activity has been
adversely affected by the EU referendum. The drops in output, new orders
and employment were all steeper than flash estimates," Rob Dobson,
senior economist at Markit detailed in the report on Monday.
downturn was felt across industry, with output scaled back across firms
of all sizes and across the consumer, intermediate and investment goods
sectors, although exporters did report a boost from the weaker pound.
However, the improvement in exports was less marked than previously
estimated, blamed in part on sluggish overseas demand. The downside of
the currency was an upsurge in input price inflation to a five-year high
on the back of rising import costs," Dobson detailed further.
Companies never miss an opportunity to hike prices, especially if they can blame it on something else.
has a story out today detailing a few firms who are hiking prices and
blaming the fall in the pound for making imports more expensive.
makers like the PSA group (Peugot, Citron and DS) said they hiked
prices by an average of 2% August 1st. Other UK businesses have also
been quick to hike prices on the lower pound.
it takes time for large currency moves to manifest in the economy,
there's been no shortage of people jumping the gun. Bloomberg
notes Scotiabank economist Alan Clarke;
"unusual" for companies to blame the Brexit referendum for cost
increases they passed along so quickly. Typically there's a six- to
nine-month lag between big moves in exchange rates and shifts in
consumer prices" he said.
Consumer goods have gone up
in price in many other areas. Mobile phones and computer prices have
risen. Even bog roll and nappies face hikes.
all bad news as companies that source and produce/manufacture from
inside the UK can largely ignore the lower GBP, which will also boost
As usual there's winners and loser from this,
even those on the same side of the fence. Smaller businesses will have
greater exposure to currency moves than larger firms. Your small high
street shop that imports from abroad won't be hedging currency or
locking in prices well into the future, like a firm as big as a car
maker would, and so is more susceptible to FX fluctuations.
no doubt that inflation will rise considering we import more than we
export but that's been an issue for years when there's big swings in
things like FX and energy prices, and it's something that the BOE can
virtually do nothing about, just like it couldn't when oil was over $100
and inflation was running over 4%. As the UK is going to be affected
first by "imported" inflation, we need to make that distinction when
trading. If inflation jumps over the next few months it won't be
followed by rate hikes. Only if domestic prices start taking off can we
start to question monetary policy.
You can read more details in the Bloomberg story here.