Macroscope | With no clear path for Brexit, expect more volatility in Britain’s markets

Britain’s newly minted Prime Minister Boris Johnson has stepped up his “no deal” rhetoric, claiming he will not meet with EU leaders unless they agree to change key aspects of a divorce deal, sending the British pound spiralling downwards. Regarding his purportedly hardline stance, Johnson’s exact words were “no ifs, no buts”. This position has prompted market concerns that the British economy could face significant disruption in the event of a no-deal Brexit. As of this writing, the pound was under renewed pressure from these growing no-deal jitters, with the currency on track for its worst month since October 2016. Despite the prime minister’s determination, the public remain sceptical. In a YouGov poll in mid-July, 56 per cent of respondents said they believed Britain was either “not very likely” or “not at all likely” to leave the EU on October 31, versus 27 per cent who said leaving on time was either “very likely”, or “fairly likely”. The British public have good reasons to doubt this deadline. Via a number of votes in March, parliament has shown it does not have a majority in favour of allowing a no-deal Brexit. It is also ready to overrule the prime minister and government to prevent this scenario. That said, there is no consensus on what form Brexit should take, either. This was why Theresa May’s deal was rejected three times, leading to her resignation. Hence, this provides some comfort that there are safety measures preventing Britain breaking away from the EU with no deal by default, but not a path to resolve the deadlock. A general election or a second referendum is unlikely to resolve the stalemate, either. The European parliamentary elections in May showed that British voters are linking their support to a particular political party with their view on Brexit. Public opinion remains divided on the issue. Another YouGov poll conducted in late May shows that 46 per cent of respondents choose remaining in the EU as their most preferred outcome, while 32 per cent choose a no-deal Brexit as their top choice. The European parliamentary elections in May showed that British voters are linking their support to a particular political party with their view on Brexit. This has prompted a decline in support for the Conservative and Labour parties, and a rise for the Brexit party and pro-remain Liberal Democrats. Why a post-Brexit ‘Boris boom’ may not be a fantasy This implies no one single party would gain a majority if a general election were held. Predicting whether the ruling coalition would be pro-remain or pro-Brexit is probably a coin-toss. A second referendum would be challenging in providing voters a clear set of options on a very complex issue, with different consequences and risks attached to each option. Could the solution come from Europe? The EU has repeatedly stated that it won’t reopen negotiations with Britain on the withdrawal agreement, and that they consider it to be final. Johnson and his team will have to make the most of the summer parliamentary recess to change Brussels’ mind. Although EU leaders have made their stance clear, it may ultimately prove logical to give the new prime minister a little more time to reach a consensus, if only to avoid a potentially negative economic impact on the rest of Europe. While nothing is certain, it is most likely that Britain ultimately leaves the EU but remains in a customs union for goods. This would require deadline extensions and perhaps more drama than the political satire Yes, Prime Minister. Hence, we should expect more volatility for the British equity, fixed income and currency markets in the months ahead. Economics or culture: what’s driving the US and Europe’s populist wave? At the same time, it is important to recognise that political and policy risks and financial assets do not necessarily follow a simple one-for-one relationship. For example, Brexit has been a negative for sterling and domestically focused companies, but it has been positive for British government bonds, given the rising possibility of interest rate cuts. Moreover, a weaker pound has boosted repatriated earnings for large-cap international companies, creating a flattering impact on corporate balance sheets. Johnson must silence doubters and resolve impasse over Brexit For Asian investors, the good news is that the direct economic impact to Asia is likely to be limited. The bad news is that this would join other global economic issues weighing on global investment sentiment, such as rising protectionism, slowing corporate investment and a limited set of policy tools to deal with the next downturn. Tai Hui is chief market strategist, Asia Pacific, at JP Morgan Asset Management

.css-1m2rp1p{color:#34b8b5;}Macroscope | With no clear path for Brexit, expect more volatility in Britain’s markets

Macroscope | With no clear path for Brexit, expect more volatility in Britain’s markets