Weekly Market Update: Sterling rallies on potential Brexit deal

Read our full Market Update Week 42

Market Update

Global stocks gained during the week in local terms, however they fell in Sterling terms after the Pound rallied versus major currencies as the UK and EU agreed a Brexit deal; one not dissimilar to Theresa May’s. However, this deal still needs to be approved by Parliament and hence uncertainty persists. Global stocks fell -1.3% in Sterling terms, despite posting a +0.7% gain in local currency terms. US stocks were up +0.6% in US dollars after a decent set of earnings relative to analyst expectations, however they were down -1.5% in Sterling terms after the GBP/USD rate touched 1.30. UK stocks were down -1.3% for the week. Globally, the worst performing sector was IT as software companies saw a correction, while Healthcare and Financials posted strong gains. Bond yields closed the week slightly higher; the US 10 year yield traded 2.5bps higher, closing the week at 1.754%, while German 10 year bunds saw their yield increase by 6.0bps over the week, closing at a yield of -0.382%. Gold was flat in US Dollar terms whilst Oil fell -1.7%.

Chief Economist Analysis

The Brexit process has become very complex in the past few days. What is currently at stake is a simple transition deal, covering basic areas of mutual concern between the EU and the UK in what is a “Hard Brexit” by 2015 standards. With the exception of the Irish conundrum, it is actually a very straightforward document to which few people would object; a repackaging of Theresa May’s deal. Yet both sides of the negotiation speak with two voices. Over the weekend, the PM sent two different letters to the EU. One requesting an extension on behalf of Parliament in order to conform with the Benn act, and a following one saying he doesn’t want the extension. On the other hand, the EU has been indecisive about granting an extension, often indicating there wouldn’t be one, and then granting one anyway. Meanwhile Sterling is oscillating to the beat of the news-flow and businesses are waiting to see in what environment they will be operating. Long term investors need to examine the long term challenges and try to answer five questions:

1.Will the PM who, in order to deliver Brexit, has broken precedents antagonising Parliament, the Monarch, the Judiciary and many institutional stakeholders on Britain’s future, including the City, be able to mend those bonds?

2.Will there be constitutional repercussions for a republic headed by a monarch, when the “people’s will”, the result of a democratic referendum, has become the guiding principle over the past few years?

3.Will the deal in its current form increase the pressures for a second Scottish Referendum? Will it further complicate issues in the Northern Ireland Assembly?

4.What will be the trajectory of the UK economy? This is still a Hard Brexit, with no trade deal in sight and neighbours whom with whom relations have been hurt, in the midst of a slowing global economy.

5.Will Britain’s economy become more focused on technology and logistics, as predicted by some, in the future, or will it continue to rely on the City and Finance?

George Lagarias, Chief Economist

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