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UK Times reports: Trump says Brexit will end up being a great thing
The UK Times report on remarks from president elect of the US Trump in an interview
Headlines via Reuters
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A grey day for the pound as May talks tough about Brexit
The pound charts mirror the current UK weather, grey, soggy and miserable.
The Times reported that Theresa May will issue the strongest speech yet on Brexit, and despite it just being a sources story, quite rightly, the pound has taken a big hit. Last week we had a similar episode when May said that Brexit means Brexit, even though that's been her rhetoric from the start.
The market is constantly looking for clarification on what approach the government will take on the single market. If the Times is to be believed, and their sources are very much worth considering, then the UK is potentially heading for a full "out", door slammed shut exit. That's what the market is fearing and that's what it sees as a worst case for the UK.
I very much doubt that will be May's actual approach unless she really is thinking about hitting the reset button. Both Europe and the UK are far too intrinsically linked to separate with a axe blow. The UK can't just sail off to somewhere warmer and open up shop. There will be an approach by the UK government to keep important ties that work for both sides but that's all to come in the negotiations to come.
The important factor to remember that this is all political, and sensible thinking doesn't come into it. The EU can't let the UK leave, and on the face of it, allow us to keep the good parts, or other countries will follow us out the door. They have to balance that up with what damage that approach might do to their other members. The UK has a lot to lose from businesses and investors leaving the UK. What will be important is how both sides try save face with whatever deals they strike.
For now we have to deal with what's in front of us and it's purely that half out/all out situation the market is trading on. We're now preparing for 'all out' remarks that may come from May, and until we hear exactly what she's going to say, you can expect volatility to remain high in the pound.
We had the first dip below 1.20 since the flash crash, and even though we've bounced since, that's shaken the walls of support down here.
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UK's May ready to announce Britain will leave EU single market
rexit reporting from Bloomberg, though they note it's a devloping story at this stage
The market is excited about May's vote pledge but it's not all it seems
Cable up 340 pips says there's a chance UK won't trigger Article 50, but that's not the case.
The pound is in the midst of its largest rally since 2008 as shorts get squeezed hard.
The headline is that Theresa May has decided to put a final Brexit deal to a vote in Parliament.
"I can confirm today that the government will put the final deal that's agreed between the U.K. and the EU to a vote in both Houses of Parliament before it comes into force," May said.
What's important to note is that this isn't a vote on Article 50; this is a promise to have a vote years from now after a new deal between the EU and Britain is negotiated. That isn't a surprise. It's usually necessary for Parliament to have a vote on trade deals.
Even if Parliament rejected the deal, it would only be a mandate to get a better deal, not to re-enter the EU. Brexit minister Davis clarified that after the speech, saying if Parliament rejects the new EU deal it won't change the fact the UK is leaving the EU.
So if you strip out the vote comment, what did we learn? Much of it was leaked ahead of time but it's clear that May unambiguously wants out of the EU and left no wiggle room to stay. "No deal for Britain is better than a bad deal," she said.
One thing May said that eased some hard Brexit fears was endorse a 'phased approach' to leaving. That's a reason for some pound strength, but is it worth more than the 340 pip rally we've gotten? Well that depends. Much of it just erases some of the recent fears about a hard Brexit -- we're only back to January 6 levels.
Maybe a better question is: Will this squeeze out some of the longer-term GBP shorts?
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GBP: 12 Key Points Of Brexit Plan; Implications For GBP Outlook
Key Points Of Brexit Plan.
1) PM May views the Brexit vote as a vote to restore parliamentary democracy and for Britain to become even more internationalist. “It was the moment we chose to build a truly global Britain”.
2) The first aim of the Brexit strategy is to provide certainty where we can.
3) The final Brexit deal will be put to a vote in both Houses of Parliament.
4) The government will ensure control of immigration to Britain after Brexit.
5) The government will pursue a bold and ambitious free trade agreement with the EU.
6) It can’t mean retaining membership of the single market.
7) The government will seek the greatest possible access to the EU which may take in some elements of the single market.
8) The UK will not be required to contribute “huge” sums to the EU budget, but we should make an appropriate contribution.
9) The UK must be free to strike trade deals with countries outside the EU.
10) The government does not want Britain to be part of the common commercial policy, but they do want to have a customs agreement with the EU. It could mean a customs agreement with the EU has to be new or for Britain to be signatory to the agreement.
11) The government wants Britain to be free to establish its own tariff schedules at the WTO, and remove as many tariff barriers to trade as possible.
12) The government will seek to avoid a disruptive Brexit cliff face adjustment and believes a transition will be in the interests of both Britain and the EU.
In light of the update on the UK government’s Brexit plans, we have decided to leave our outlook for the pound unchanged for the year ahead. The plans were broadly in line with our expectations and have failed to trigger another adjustment lower for the pound. “Hard“ Brexit concerns may have just peaked in the near-term.
We continue to believe that the bulk of the adjustment lower for the pound in response to Brexit concerns has already taken place which leaves the pound undervalued.
The main downside risk for the pound going forward is that the negotiations between the UK and EU could break down thereby increasing the likelihood of a more disorderly Brexit. However, we doubt that talks could break down as early as this year. The conciliatory tone of the UK government’s comments and plan for a “cleaner” Brexit have further dampened the risk of a more disorderly Brexit. The market may now find it more difficult to find catalysts for fresh pound selling through the remainder of this year. The market’s focus could also shift away from Brexit to upcoming political risks in Europe helping to ease downward pressure on the pound in the coming months. It supports our view that the pound could be close to bottoming in the near-term especially against the euro. We expect EUR/GBP to fall back towards the 0.8000-level and target GBP/USD at 1.2800 into year-end.
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Speaking on Bloomberg TV in Davos
Interesting comments coming from the JPM CEO, who, with other banks like Goldies and Morgan Stanley, have a Davos date with Theresa May tomorrow. How time flies eh? It wasn't so long ago that countries were bailing their sorry arses out and now they think they're in some position of strength over both the UK and Europe.
Brexit & Sterling: 'Hope For The Best, Position For Lows'
Prime Minister May’s speech painted a rosy future for the UK outside the European Union and at the centre of the global economy, but the near-term implications of the speech look to us quite different and more negative than the interpretation embraced by markets.
The speech left no doubt that the UK is prepared to move towards “hard Brexit”: whether the European Union will be willing to negotiate free-tariffs agreements while the UK restrains immigration from EU countries and removes itself from the European Court of Justice’s jurisdiction remains highly unlikely, in our view. The UK's position on its contribution to the EU budget and the threat of significant tax reductions also have the potential to toughen the EU's negotiating stance. The European Market, due to its size, is more important for UK trade than the UK is for the European Union and, in our view, PM May's 'red lines' remain incompatible with deals that de facto would grant the UK free access to the Single Market. At best, experience teaches us that it takes an extraordinarily long time for trade agreements to be negotiated and voted by EU Member States. At worst, the fact that Ms. May stated she will not look for an “unlimited transitional status” and that “no deal is better than a bad deal” puts on the table the possibility that EU-UK trade relationships will be governed by WTO rules in approximately two years’ time. There will also be a high degree of uncertainty over the legal framework governing the trade in services for a long time.
All of this is unlikely to be positive for the UK and its currency in 2017; yet, Sterling recorded the largest positive daily move since 2008. Although positioning, a stronger-than-expected UK inflation print and President-elect Trump’s comments on the value of the USD could also have contributed to the Pound’s appreciation, GBP/USD strengthened during the Prime Minister’s speech, which suggests to us that the market had a more positive take on the government’s plan than we do. This could be either because the market prices that a free-trade deal with the EU could take place with a higher probability than we do, or perhaps because it expects little fallout from Brexit on the economic outlook, a view to which we and our economists do not subscribe. Even though the economy has remained strong, we expect a deceleration in 2017 and more QE from the Bank of England (an additional GBP50bn purchases of Gilts) in the second half of the year.
For all these reasons, we see the squeeze higher in Sterling as a better entry point to take short positions on GBP/USD. Our forecast remains GBP/USD at 1.20, 1.18 and 1.14 in 3, 6 and 12 months, with the risk that this forecast materialises sooner rather than later.
While only time will tell whether the rosy picture painted by the Prime Minister will remain wishful thinking or become a reality that represents a new steady state equilibrium, which would happen some years down the road, our message for 2017 remains: hope for the best but position for Sterling lows.
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Analysis: Why ‘Brexit Means Brexit’ is not That Bad for Brokers
Brexit has been on the minds of financial services executives for just over six months now. After an initial bout of uncertainty that has been worrying for the industry, expectations are starting to stabilize. Currently banks are laying out their contingency plans for exit from the European union and are hoping to appease the UK government into negotiating a good deal for financial services.
Caught in between the arms twisting race between the UK government and big banks, the UK brokerage industry is one that is fearing the worst for its operations. The firms targeting EU clients will have to seek separate EU regulation, since May said that a Switzerland or Norway option is out of the question.
The UK Financial Conduct Authority has recently outlined its tough plans for the retail forex and CFDs industry with the introduction of a leverage cap of 1:50. The message is clear – the UK government is aiming to diversify its economy away from financial services. Talks of re-industrialization of the country are met with applause at home by the very same people that voted for Brexit.
UK’s Negotiating Leverage for London
Brexit is obviously going to happen, there should be little doubt about it at this point, however London can get some special treatment. Theresa May’s speech on Tuesday has outlined that the government is aiming to protect the interests of London’s financial sector, but at this point all this largely hinges on the position of the European Union on the matter, or so people say.
In actuality the UK is in a pretty good position from a negotiating point when it comes to a free trade agreement. Here is why – while the UK has a net £20 billion surplus when it comes to services, the goods net trade deficit with the EU is of nearly £100 billion with the European Union in 2015.
The difference is clearly a worry for German manufacturers more than it is for the UK financial sector in nominal terms. This is the position of the UK government that is committed to follow the results from the Brexit referendum. The alternative scenario of not adhering to the vote would be greatly undermining the UK’s democratic process.
Looking at the Rest of the World balance for the United Kingdom, its service sector is exporting a net of £67 billion in services, and importing a net of £30 billion in goods.
The Broker’s Perspective – Refocus Globally
This is the time to focus on the brokers’ perspective in case of a clear EU break with no passporting rights into the EU. Financial services clients from China, India, the Middle East and North Africa have way more confidence in doing business with London than with any other European city.
Granted, some business in the European Union will become tougher and not all brokers will have the ability to obtain a license on the continent, or at least not very quickly. What the brokers should do is not focus on ‘Brexit means Brexit’, but on the new hype that Theresa May is pushing – “Global Britain”.
Time to Expand Outside of the EU
Brokers should be urgently moving towards a global focus and use the leverage that they have with FCA regulation. Targeting EU clients has been relatively easy when compared to the rest of the world, so additional financial commitments will be needed, but as the European Commission ironically points out “over the next 10 to 15 years, 90% of world demand will be generated outside Europe”.
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Brexit - EY ITEM Club warns UK consumer spending expected to fall this year
EY ITEM cite increasing import costs, rising inflation &stalling employment growth to squeeze households' disposable incomes