Midterm Report – The Impact and the Future of Brexit
For the UK population, the outcome of the EU Referendum vote was more akin to social status and national pride than any real understanding of what implications there would be if Britain voted to go it alone.
While there was plenty of scaremongering by the remaining camp, even today its unclear what actual impact there will be to the UK economy over the short, medium and long-term, and it’s not likely to become clearer until the British government has completed negotiations on key issues including freedom of movement, single market access and of course, trade.
Across the EU, Britain’s decision to leave the EU certainly had The Establishment a little anxious, with the rise of populist parties across major European economies threatening the future of the EU. For now, Britain stands alone, but how Brexit impacts the British economy will be watched closely and other countries may follow if it turns out to be a better life for the average Brit.
Brexit Impact So Far
Brexit has certainly had an impact on the UK economy since the EU Referendum, though few will have predicted the performance of certain asset classes or the resilience of the UK economy to date.
The scaremongering seemed to have gotten the better of even the Bank of England’s monetary policy committee in August 2016, with the Committee cutting interest rates to 0.25%, while also increasing the QE Total to £435bn. The move came off the back of a sudden fall in private sector productivity, reflected in August 2016’s PMI numbers.
Mark Carney and the team had a dilemma on their hands, whether to protect the economy or manage inflation and the decision was that the economy had to come first. Of greatest surprise was perhaps the fact that the decision had been based upon survey data.
There were many notable events and market moves in response to the result of the EU Referendum, but some of the more material ones included:
David Cameron made a watery exit, opening the door for Brexit skeptic Theresa May to take the helm only to lose the Tory Party majority in a summer 2017 snap election that weakened the government’s negotiating powers at the Brexit table in Brussels.
The FTSE100 hit a record high 7,778.64 on Friday, 12th January, with the gains coming off the back of a slump in the Pound that supported a positive outlook for UK multi-nationals. Multi-nationals listed on the FTSE100 account for more than 70% of the index’s earnings and, with global economic growth positive, the weaker Pound was certainly a favorable outcome.
It wasn’t plane sailing for the 10,000 however, with the FTSE100 touching sub-6,000 levels shortly after the Referendum before the smart money started rolling in.
Cable slumped from a pre-EU Referendum $1.4877 to a post-referendum low $1.21, which also included a flash crash on 6th October from $1.26 to a momentary low of $1.1491, which hit the Asian markets, with European and U.S markets closed at the time.
Since the days of the flash crash and the immediate panic of Britain leaving the EU, the government has proceeded in abiding by the wishes of the people, by invoking Article 50 and setting the official date of Britain leaving the EU as 29th March 2019. Here are some of UK economy stats that can shed light on the Brexit affect:
The UK economy is estimated to have grown by 0.6% in the final quarter of 2017, managing to avoid a recession.
The softer Pound has supported the real estate market, with foreign investment surging into the sector since the Pound’s collapse.
Inflation hit a post-EU referendum high of 3.1% and continues to hover at 3% levels, well above the BoE’s 2% target in spite of a November 2017 0.25% rate hike, the first since before the Global Financial Crisis.
Economists came forward at the turn of the year to admit that growth forecasts had been too pessimistic, the candidness coming in spite of the IMF’s downgrade to UK growth projections for this year and next.
Volatility in the Pound has persisted with more than a year of uncertainty moving the Pound in both directions, with a soft-Brexit being favored by the markets.
While the financial market response to the EU Referendum was debilitating for some, InterTrader’s chief market strategist Steve Ruffley sees the entire Brexit vote and process as an opportunity.
“I think from a trader’s perspective you can only class the whole Brexit situation as an opportunity. It’s easy to get dragged into the emotional and political drama, will it be good for the UK? Will it be bad? I personally don’t know, and more importantly, I really don’t care, that’s all in the future. What it does mean however that in the short term there is uncertainty. This I can use to make money trading.”
“The effect of the doom and gloom of the ‘remainers’ never seemed to translate into Armageddon for the stock markets, in fact, the FTSE after an initial wobble has done nothing but made record highs. The FTSE historically always looked shaky above the technical and psychological 7000, but now it looks and almost certainty to hit 8000.”
According to Ruffley, not only the stock market in the UK reacted positively to Brexit but also other investments: “There has been a record ‘startup’ investment, there has been plenty of commercial building approved and there has been no mention of a wholesale shift of banks the EU. Sure we may lose a few 1000 bankers to France, Germany, and Amsterdam… it’s not like the city will miss a few bankers.”
Although so far, the British economy did react positively to the separation of the EU, the British pound was sensitive and quite volatile since Brexit. InterTrader Chief Strategies, Steve Ruffley explains:
“The main loser in the Brexit fallout is the GBP. Against the major and minor FX pairs, the GBP has seen significant downside pressure. This is where the unknown comes into play for speculators. Whereas the global stock market rally has maybe just taken the FTSE with it for the ride the GBP has certainly taken the full force of Brexit ‘fear factor’”.
“With the US the first to move on interest rates it’s not a surprise that there we big losses for the GBP against the USD. Down at 1.21, there was the real danger of the GBP/USD getting to parity. This was always going to be shorted lived in my opinion as the low pound was always going to bring inflationary pressures, and after 10 years of ultra-low rates, it didn’t matter what policy Carney though he has simply run out of time and rates had to go up, so any scenario where the GBP only got sold was always going to be short-lived. I see every Brexit step forward bringing that fear level down and I still see the GBPUSD heading back to 1.50 by the end of the year”.
“What was more interesting to me was the level of selling we saw in the minor FX pairs. Take the GBPNZD for example. We saw the GBP drop to 1.68 against the Kiwi. We have since seen a rebound but not as much yet as I anticipate. This goes back to that ‘fear’ and speculation. You look at the facts, 4.8m people and an exporting country vs the city of London. The two side by side seems like David and Goliath in economic terms, so when the GBP starts to rally, and it will, I see the biggest gains coming from these type of minor FX pairs that have seen the greatest over extensions”.
Brexit – A Prediction of the Most Affected Instruments
Looking ahead, the recent rally in the Pound has come from a shift in market sentiment towards Brexit, with the Dutch and Spanish governments insinuating that a soft Brexit may be on the horizon, with Britain able to maintain close ties with the EU. The Jury is out on whether the likes of Germany will be as forthcoming as its neighbors and provide Britain with the best possible Brexit outcome.
Either way, with the BoE having to turn the screw on monetary policy in order to curb inflation, Brexit or not, the Pound is unlikely to stay at current levels. With this logic in mind, a return to $1.5 levels against the Dollar should also see the FTSE100 pull back to sub-7,000 levels initially and then ease back further as economic momentum slows.
When InterTrader’s Steve Ruffley was asked about his Brexit predictions for the next year and whether there are any specific instruments that traders should add to their watch list, his 5 predictions for the year were as follows:
There will be a significant correction in the FTSE100. Maybe below 5000. It is impossible to know exactly what will trigger this but it will not be Brexit related. It will be the Goldman Sachs and the 1% who decide to cash in.
The GBP can only go up. Carney has backed himself into a corner. Debt is too high, inflation is too high, and time has run out for ‘accommodation’. The average man on the street will now have to pay up. Interest rates will go up and the GBP will follow. So GBPUSD, EURUSD, and any low trading GBP pair should be looked at.
Gold has rallied back to the $1300 mark. This is a significant 50% retracement of the last bull move where we reached $1900. This is traditionally a protection against inflation and store of wealth, for an older generation that is. Take the rise of Bitcoin and cryptocurrency. I see gold crashing back to $1000.
Bitcoin. The great Bit-con. Dow Theory states that asset process trade at a level as everything is known. We don’t know the identity of the creator of Bitcoin. How then can any price be a true reflection of what is known? It’s a fad that will go as fast as it came leaving in its wake a sea of ‘investors’ who lost the lot.
The EUR is hugely overpriced. Once again the EU is bankrolled by Germany, a huge producer, the strong EUR does it and the EU no favors. It seems the GBP loses in the Brexit scenario and the EUR wins. This will reverse as it is lose-lose for both sides. I would be selling highs in the EURGBP 8.056.
There are certainly plenty of opportunities ahead when it comes to the Pound and the pairings and the likely pickup in volatility will provide plenty of scopes to reap the rewards, whatever the outcome and ultimate impact of Brexit on the UK economy.
This article was originally posted on FX Empire