Brexit: Everything You Need To Know

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Join date: 2012.10.01
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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:

In 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. 

The 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)

Although 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 do so.

]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 states. 

Scenario 2: No Brexit, return to status quo (30% probability

We 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.

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Brexit - is the UK in for a constitutional crisis and what that would mean

In the aftermath of the Brexit vote you know how everyone on social media has turned into a constitutional law expert?

Cool, isn't it?
Well, now it my turn

Here's an interesting read on Bloomberg, from a real life professor of constitutional and international law at Harvard University 
Join date: 2012.10.01
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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 own

  • 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
Says 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."

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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.

The 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 ultimate decision."

The firm, 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.”


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Histrionic headline award: GBP becomes more unstable than Bitcoin following Brexit

The screaming, hysterical headline:

  • Pound sterling becomes more unstable than Bitcoin following Brexit

The subheading continues the theme:
  • Bitcoin, long held as the standard for instability, is becoming a safe refuge when compared to the post-Brexit pound
Dear oh dear ... The article then furiously back pedals:
  • For a brief period this week, Bitcoin's 10-day historical volatility - a measure of how much its price has been changing - dropped below that of the British pound.
Yeah, for about 5 minutes.

Still, something for the axe-grinders, book-talkers, clueless and noobs to chatter about on their forums. Here's the article, just for giggles.
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UK Parliament to debate Brexit petition

The much talked about Bregrexit petition started by all the bad losers will enter Parliament for discussion

The Commons Petitions Committee has confirmed that they will be putting it forward for debate after over 4 million signed it.

The committee had also been working on weeding out any dodgy signatures.

The Evening Standard report the petition will be discussed September 5th.

It's a potentially small risk for the market as it's very doubtful that anything will come of it.

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Germany says Merkel and May will be able to discuss Brexit at talks today

German govt spokesman out on the wires 20 July 2016

  • there will be no pre-negotiations on Brexit but that doesn't mean they can't discuss it
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Merkel: UK and Germany have always worked closely together

From Merkel:

  • Talks on Brexit can only proceed once Article 50 invoked
  • She wants to continue to strengthen UK ties
  • Talked with May on refugees, G20, Turkey and Russia
  • It's up to Britain to decide on what they want in Brexit talks, only then can talks start
  • We need to avoid excessive uncertainty over Brexit

From May:

  • We both want to maintain the closest possible economic ties
  • I've been clear that 'Brexit means Brexit'
  • Germany will remain a vital partner
  • We have agreed to deepen bilateral military partnerships
  • We are not walking away from our European friends
  • Brexit will take time, require serious, detailed work
  • UK companies employ 220,000 people in Germany
  • Won't invoke Article 50 until objectives are clear, won't be before the end of the year           
  • We will deliver on curbs on migration for UK voters
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Hollande: The 'sooner the better' for implementing Brexit

The Theresa May European tour continues

  • The 'sooner the better' for implementing Brexit
  • Mutual understanding needed for UK to notify Brexit
  • As UK leaves, we will have to maintain the closest possible relationships


  • Brexit means Brexit
  • UK wants to work with France to boost trade
  • Sensible negotiations done in calm, orderly way
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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:

  • "I 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.
An 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.
(There isn't much more at that link)
Also from the G20, all of these at Reuters:
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Brushing Off Brexit

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 lows.

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 austerity plans.

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 years.

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 months.

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.

(You can find the full article here.)

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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?

Firstly, 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.

Secondly, 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. 

Now, 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.


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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 mid-February.

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.

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Brexit Darkens UK Factory Activity in July: PMI

UK manufacturers face a rapid slowdown in economic activity after the EU referendum in favor of Brexit undermined business and consumer optimism.

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.

"The 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.

"The 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.

read more

Join date: 2012.10.01
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Here comes the inflation following Brexit

Prices are going up in consumer goods

Companies never miss an opportunity to hike prices, especially if they can blame it on something else.

Bloomberg 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.

Car 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.

Although 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;

"It was "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.

It's not all bad news as companies that source and produce/manufacture from inside the UK can largely ignore the lower GBP, which will also boost exports.

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.

There's 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.