UK and EU agree on trade deal: The UK government and the European Commission have managed to overcome their differences on the outstanding issues of fisheries and level playing field – the common rules and standards governing fair competition and state-aid. There’s not enough time for a vote by the European Parliament to give consent to this trade agreement following the usual process, which may take weeks. And the treaty needs to be translated and scrutinised by the 27 governments across the EU – typically a rather lengthy endeavour. So, given the unique situation, the European capitals will follow a special approval process, partly based on the draft unofficial text – at least initially. A meeting of ambassadors is going to be the first ratification step, others will follow over the next few days.
What does a deal mean for the economy? A Brexit deal likely implies border disruption and higher import costs, at least temporarily. In addition, the agreement that’s been reached is rather ‘skinny’: there’s limited regulatory alignment and services aren’t part of it. Of course, this avoids UK-EU tariffs – which would have happened in a no-deal outcome. Putting all this together, a moderate economic hit is probably inevitable. However, Brexit is happening in the context of the Covid-19 outbreak, which requires ongoing fiscal support. With the Bank of England anchoring funding costs at low levels, the UK government is likely to continue to provide stimulus, given the health crisis. This should mitigate any Brexit impact. The outlook is very uncertain over the longer term, but not necessarily in a negative sense: there will probably be both challenges and opportunities. They’re likely to depend on the relationship between the UK and both the EU and the rest of the world – on trade but also more generally – and on how London’s financial centre adapts to the new environment. As always, the devil is in the detail.
How about the impact on markets? This Brexit deal is unlikely to be a huge market mover, as this was the consensus expectation – thought perhaps only by a relatively small margin most recently. A no-deal outcome, conversely, would have represented a negative surprise. However, FX volatility had increased over the past few weeks, and sterling did swing quite a bit in response to the newsflow. In the past 24 hours, it has started to rebound – in anticipation of a deal – while bond yields have risen and equities rallied. Extra knee-jerk reactions are quite possible. Should the UK economy weaken more than elsewhere, perhaps because of the above-mentioned temporary disruption to trade flows, we would expect the more global FTSE 100 to outperform the more domestic FTSE 250. However, this is likely to be cushioned by an improvement in the domestic outlook too: the recent vaccine news strengthens the case for a bounceback in activity from next spring, as immunisation would allow the reopening of large parts of the economy, and monetary and fiscal policy would stay very expansionary for a long time.
Daniele Antonucci | Chief Economist & Macro Strategist
This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document – based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. and are subject to change. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.
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