Brexit

Brexit Bulletin: Sterling Surges After Theresa May Relents

Relief for the battered currency at last

Pound Rebounds as May Accepts Parliament Brexit Vote

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Prime Minister Theresa May bowed to parliamentary pressure by saying lawmakers can vote on her strategy for removing Britain from the European Union, prompting the pound to surge against all of its 31 major peers.

Today will see a debate on how to proceed once May has crafted a plan. It’s not clear what form the proposed scrutiny will take, nor when it will come. What is clear is that there won't be a vote on whether to leave the EU or on triggering Article 50. 

The concession still hands lawmakers wanting to keep close ties to the EU a tool to pressure May, whose Conservative Party enjoys only a slim majority. It helped calm investors who had grown concerned by the government’s apparent gung-ho approach to Brexit following signs it was happy to dump membership of the single market.

The overnight development remains "pretty vague" and "may not monumentally change the political landscape," Nick Probert of Nomura Holdings Inc. told clients. 

Also cheering markets was a report from BBC Newsnight that the government may be prepared to continue payments to the bloc to retain rights and market access. 

 

Slovenian Premier Miro Cerar had told Bloomberg’s Michael Winfrey and Boris Cerni earlier on Tuesday that the red lines Britain has signaled it will adopt in the talks are “fully incompatible” with keeping membership of the single market.

Meanwhile, Brexit Secretary David Davis has accused Treasury officials of trying to “undermine” the Brexit talks, according to the Daily Telegraph. He thinks there has been a “succession of Treasury briefings that are damaging negotiations,” the newspaper said.

The U.K. Stocks That Aren’t Booming

The FTSE 100 on Tuesday reached an all-time high as large cap companies continue to be lifted by the weakest sterling in three decades. About 75 percent of sales of companies in the index come from outside of U.K., allowing them to brush aside domestic concerns, according to UBS.

One U.K. equity gauge is nevertheless stalling, according to Bloomberg’s Aleksandra Gjorgievska. The FTSE Local United Kingdom Index, which includes companies that make 70 percent or more of their sales in the country, is poised for its biggest annual drop since the global financial crisis. 

The local index includes Lloyds and homebuilder Taylor Wimpey, which have lost about a quarter of their market value since the vote.

That may say more about the post-referendum outlook than the benchmark index.

“This is a country that’s a quasi-emerging market now,” said Nicholas Spiro, a partner at London-based Lauressa Advisory. “The extremely buoyant conditions in the equity market right now are somewhat deceptive.”

Stagflation Worries?

The pound’s plummet “does create some problems for the Bank of England,” Catherine Mann, chief economist at the Organization for Economic Cooperation and Development, told Bloomberg Television on Tuesday. If it stayed 10 percent or 15 percent off its high, then “that gets passed through to higher inflation, and in a two-year horizon we’d be looking at a stagflation situation with lower growth and higher inflation and that, of course, is place that central banks really don’t like to be.”

While not going that far, policy maker Michael Saunders warned yesterday that the U.K. is “going to have an inflationary effect coming through in the next two to three years from the drop in the pound.”

At JPMorgan Chase, economist Allan Monks is also advising clients that the pound’s decline is likely to do more harm than good. While he’s kept his forecast for economic growth unchanged at 1.3 percent next year, he's raised his inflation prediction to almost 3 percent.

Banks Still Battling

Finance industry executives took another shot at lobbying the government by warning failure to maintain easy access to Europe’s single market will force them to move jobs and operations there.

At the U.K. Financial Services Brexit Summit in London yesterday, Citigroup’s top banker in the U.K., James Bardrick, said the key decision was when to trigger their contingency plans and start moving abroad. John Nelson, chairman of Lloyd’s of London, said the shift may begin in the first half of next year.

Lloyds Banking Group Chairman Norman Blackwell bet financial firms will open offices “all over the place” across the EU rather than choose a single rival to London. His bank is already among banks preparing to create new subsidiaries or expand existing ones to maintain access to Europe, according to a person with knowledge of the matter.

Adrian Montague, chairman of Aviva, spoke for most in the room by saying his insurer likes “the status quo, thank you very much.”

Separately, VTB Group, Russia’s second-largest bank, will continue to cut back operations in London after the U.K. decided to exit the EU, CEO Andrey Kostin said.

Brexit Bullets

And Finally...

Alexander Downer, Australia’s high commissioner to the U.K., had some upbeat advice for the British government at the Brexit summit. He scoffed at the notion it wouldn’t be able to negotiate trade pacts because it lacks the expertise.

“You torture yourselves,” he said. “You really can’t come up with a few trade negotiators? Don’t necessarily be too pessimistic. Plenty of us have done OK without being members of the EU. Ever tried being Australia? Look where we are geographically. The message you need to send the world is one of optimism.”

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