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Brexit – As Britain Leaves the EU, the UK Remains Divided as do the Financial Markets and the Pound

It’s been a wild ride for Britain and the Pound since the summer of 2016 when Britain decided to jump ship and we may see a few more twists and turns…
Bob Mason
Parliament

The Saga

Back in 2016, the British electorate went to the polls for a once in a lifetime vote. Few would have anticipated what was to come in the years ahead. Very much in the same way as few had anticipated the outcome of the EU Referendum.

As the results filtered through, it became rapidly apparent that voters had bought into the anti-EU campaign.

The markets had anticipated ‘a remain’ outcome, which was reflected in the Pound’s movements on that famous day.

We even saw a flash crash, where cable slumped to sub-$1.20, which wiped out a vast number of brokers across the globe that had laid a 1-sided bet.

Looking back to late 2016, Cameron’s tears just about summed up how the remain camp felt.

Housewives of bankers had voted to leave and, in getting their desire, soon realized that they had just voted their breadwinners out of their jobs.

Corporations hit their panic buttons and began laying out contingency plans to protect against a hard Brexit.

As British PM David Cameron made way for Theresa May, things went from bad to worse. Snap elections left the Tories on an even weaker footing at a time when a majority was a must.

It couldn’t have been any worse for a British PM who had actually sat on the Pro-Remain camp.

From the time Theresa May took over, extensions kicked in and Britain learned the hard way just how difficult the EU can be. It may have proven to be the final nail in the coffin…

When considering the rise in populous governments across the region and the threat of departures from the EU by the likes of France, Italy, Spain, and Greece, it was a bad time all around.

It, therefore, came as little surprise that the EU dug in its heels in a bid to fend off the threat of other member states jumping ship.

The Pro-Brexiteer

After 3-years of political wrangling, rate cuts by the BoE, General Elections that went the wrong way and blood, sweat and tears, we have seen Britain return to its glory days.

Theresa May’s resignation in late 2019 was not quite a falling on the sword event as she had little choice.

Boris Johnson’s resounding victory that was compared with the hay day of Maggie Thatcher, however, couldn’t have come at a better time.

Who better to lead Britain out of the EU than the Brexiteer himself…?

Fast forward to 2020 and Britain is enjoying its final day as a member of the EU.

While Boris Johnson and the Brexiteers may feel that they are the victors, it is really the EU that has lost.

For the EU, Brexit has become a blueprint for other member states, though much will depend on how Britain morphs through the transition period and beyond.

Not even the British Prime Minister is in a position to say how things will pan out for Britain.

As a member of the top 10, by GDP, this is a major geopolitical event, however, and has not been taken lightly.

The 2019 General Election just showed how the markets need to brush aside the noise and look to the facts.

Britain’s electorate had a 2nd chance to vote on Brexit.

Granted, while no one wanted Corbyn, the Lib Dem option was on the table. The performance, however, demonstrated just how much Brits had grown tired of the EU’s ways…

1-year Transition Period

As Britain enters its 1-year transition period that has been capped by Johnson and the Tory majority, the EU will find itself divided once more.

For the Pound and the global markets, hopes of an end to Brexit chatter has been dashed.

Not too dissimilar to the last 3-years, trade negotiations are unlikely to go smoothly. In fact, the EU may prefer to cut the hand that feeds it rather than finding a mutually beneficial trade agreement.

Well, Britain was certainly not benefitting from the EU terms, so anything may end up being better.

Imagine having bilateral agreements with the likes of the U.S, China, Canada, Australia, Africa, and LatAm or better yet, enter into free trade agreements with some, if not all.

Boris Johnson has a full 11 months to deliver on his promise of making Britain better or, taking a line out of his pal’s book, making Britain great again.

The Pound and the Footsie

What do the markets think of all of this?

Well, if we look at the Pound, it’s been quite a ride. While we have seen support kick in of late, a return to the days of $2.1 seems unlikely for now.

It was back in November 2007 when the Pound hit a current millennium high $2.1162.

While a downward trend was in evidence since the 2007 peak, it was 2016 that delivered the biggest blow.

A visit to sub-$1.20 in October 2016, January 2017 and September 2019 reflected the market view.

For the FTSE100, a 12% slide in Cable from 23rd June 2016 to date supported a 16.5% rally over the same time period.

So, with Britain leaving, why is the Pound sitting at $1.30 levels?

Because Brexit may prove to be the tonic that the UK economy needs. With Trump on the other side of the Pond, it could turn out just right for the Brexiteers.

It could, however, end up in a complete mess. It’s the uncertainty that leaves the Pound in limbo, wedged between the pre-EU referendum levels of $1.48 and post-referendum lows of $1.19.

Britain could fail to reach trade agreements with its main trading partners, leaving WTO terms to replace EU terms.

That would most likely lead to companies relocating headquarters to the EU or even to another continent, which would leave Britain out in the cold.

The Armageddon outcome is one that is hard to swallow, but seems also a stretch… It is easy to get wrapped up in the chatter, however…

If we look at the FTSE100, Brexit has had little impact. In fact, the weaker Pound has been a boon for the 100, around 70% of which earn revenues from overseas. Translate Dollars into Pounds and Britain is not a bad place to be.

Throw in incentives that the government will likely offer for companies to remain and it’s not the doom and gloom that many had talked of. In fact, we’ve seen major multinationals reverse threats of leaving. Why? Perhaps Britain’s relationship with the U.S is one…

The Outlook

If anyone truly knows what lies ahead for Johnson and the British economy, they would be guessing…

Granted, the EU may not fold but further cracks could appear should the Establishment look to punish the British electorate.

Honestly speaking, threats of blocking the Channel Tunnel and banning British airlines from landing in France were just ludicrous.

Macron made a name for himself, but just not the one he perhaps would have wanted… Such action could accelerate the EU’s implosion and that’s certainly not a legacy any pro-EU leader would wish to have.

If Britain fairs well beyond the EU and better yet, passes up on an EU hard line on trade, expect the rest of the fifty-fifty members to follow.

Assuming that the EU survives, it will at least be forced to change its ways and the handling of member states.

Many will have the British electorate to thank for that. The EU Referendum was a big statement. It was the 2019 General Election, however, that really put the writing on the wall…

As for British companies and the Pound, progress on trade agreements and expect pressure to build on the EU.

That jump in the Pound may ultimately undo the FTSE100 rally, but that isn’t and shouldn’t be the primary concern.

Economic prosperity and an environment free from the threat of trade wars is likely far more alluring for the multinationals that have decided to remain within the UK.

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