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Brexit: Everything You Need To Know - page 3

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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

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

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

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:

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.)


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.



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.


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


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.


Brexit could be delayed until late 2019 with UK government departments not ready yet

The Sunday Times with the story. Reuters reporting 14 Aug 2016

  • City sources cited as having been privately briefed by UK govt ministers
  • Brexit govt departments not ready/fully staffed
  • Article 50 could be invoked later than currently thought as outlined by PM May and intl trade minister Liam Fox both of whom had pointed to early 2017 for pressing the trigger
  • elections in France (May) and Germany ( Sept) could also push back the timing says the report

As I mentioned in my previous post re the late fall in GBP on Friday ( albeit amidst general USD demand but with most GBP pairs closing on session lows) it's not unreasonable to suggest that reports of these latest comments were circulating already in advance of publication.

The words "City sources having been privately briefed" offer a bit of a

Expect the pound to remain on the back foot though, even if some of this is already in the market, as both Haldane's comments and this report mean more, and prolonged, uncertainty.

More from The Sunday Times here (gated).

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