(10 October 2019 ) DAILY MARKET BRIEF 2:UK economy Brexit: Tempers rise as time is running out

(10 October 2019 ) DAILY MARKET BRIEF 2:UK economy Brexit: Tempers rise as time is running out

10 October 2019, 13:31
Jiming Huang

Sources close to the British PM Boris Johnson have accused German chancellor Angela Merkel of making a Brexit deal "essentially impossible", which prompted an angry reply from the EU Council President Donald Tusk who said that now was not the time to engage in "stupid blame games". Are we witnessing one of the defining moments of the Brexit saga?

byUBS Editorial Team 09 Oct 2019

Angela Merkel with Boris Johnson (here at a meeting in August in Berlin): Sources close to the Prime Minister have accused the German Chancellor of blocking a deal. (Keystone)

A row has erupted between Brussels and London over the interpretation of a leaked phone call between Angela Merkel and Boris Johnson on Tuesday morning which a No 10 source described as "challenging" given the German chancellor's insistence to hold Northern Ireland for an indefinite time in the customs union.

"Hopes for the UK and the EU reaching a Brexit deal this month were already low, but they seem to have been dealt a further blow as reports emerged from Downing Street that the talks were on the verge of collapse," says UK economist Dean Turner. In the eyes of the EU, UK PM Boris Johnson's proposals for an alternative to the Irish backstop do not go far enough. From Johnson's perspective, the latest concessions are at the limit of what is politically feasible, he says.

Separately, The Times reports of a rebellion within Johnson's party ranks, with five cabinet ministers and "a very large number" of Conservative parliamentarians potentially set to resign if it comes to a no-deal Brexit.

Sterling weakness in recent sessions hints that market fears about a no-deal Brexit are rising again, but CIO believes this is unjustified. "In our view, a deal this side of the October 31 deadline was unlikely, so the latest developments have changed little. An extension and an election remain the likely path, which should give the pound some scope to recover," Turner says.

Predicting the ultimate outcome of Brexit remains difficult. As a result, the longer term risk-return outlook for UK equities looks uncertain. But given its belief that a disorderly exit on 31 October is unlikely, CIO still sees upside for the pound and are overweight it versus the US dollar in its FX strategy.++


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