Brexit: Weekly Update

Managing Director
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Posted on August 8, 2016

Markets
Last week’s ‘Super Thursday’ saw the Bank of England (BoE) slash interest rates from 0.5 per cent to 0.25 per cent, marking the lowest rate since the BoE’s inception in 1694. The BoE’s new policy also includes buying ᆪ60 billion of UK government bonds and ᆪ10 billion of corporate bonds in the next 18 months, and creating a ᆪ100 billion loan program for banks. These massive moves mark the BoE’s first major policy decision since Brexit and Mark Carney’s most pivotal action since becoming Governor.
The strategy was revealed amid the BoE’s announcement of the biggest cut to growth forecasts since they began forecasting growth in 1992, which reduced growth in May 2017 from 2.3 per cent to 0.8 per cent. The last time that the BoE slashed interest rates was during the height of the financial crisis in March 2009. A majority of the members on the BoE’s Monetary Policy Committee are expected to support further reductions closer to zero per cent.

The pound sterling reacted to the news by immediately plummeting 1.5 per cent. While the US Labor Department reported strong employment figures last Friday, the pound opened this week at a dismal $1.31. The pound is currently the worst performing currency within the sphere of G10 countries. Alternatively, the FTSE 100 shattered the 52-week high since the announcement as roughly 70 per cent of companies that make up the index derive their revenue abroad, allowing them to increase their profits as the pound tumbles. The FTSE 250 reacted favorably to the BoE’s cash injection, which has since regained the 14 per cent loss experienced since Brexit and has now climbed higher than pre-Brexit levels. Finally, bond yields dramatically fell upon the BoE’s announcements as Britain’s 10-year Gilt (the UK equivalent of Canada Savings Bonds) reached 0.64 per cent for the first time in history.
Conservative Party
In light of this picture, where will the Conservative government’s fiscal spending be allocated? The answer to this question is a mystery thus far and will be the responsibility of Chancellor Phillip Hammond to answer. Hammond means to ‘reset’ the economy, and that may mean policies and spending in fiscal margins that are rather unconventional; for example, the use of tax reductions that would inspire consumer spending.
Chancellor Hammond was also busy meeting UK business leaders and, for the first time, he has begun to publicly consider leaving the European Union (EU) single market. While the consideration was met with opposition, notably by the City of London Corporation, the Treasury floated the idea of full two-way access and permitting financial passporting similar to Norway’s model. This positioning should be understood as political posturing or an outright bluff. The UK will not easily forfeit the opportunity of remaining in the single market. Large European companies also will not quietly allow their commerce with the UK to be impeded by tariffs. More than anything, Hammond is testing the waters and waiting for a reaction.
Labour Party
Incumbent Labour Leader Jeremy Corbyn and rival Owen Smith shared a stage in Cardiff, Wales last week in what was the first of many meetings in the Labour leadership campaign. Apart from how to resolve Brexit and the UK’s Trident nuclear program, the two men share the same political views. The event, where both candidates continuously called for party unity, saw the unshaven and casual, yet passionate veteran Jeremy Corbyn contrasted against the incredibly formal and professional Owen Smith. Smith, who gave the on-air impression that he could host a television series if his leadership ambition went awry, will have to convince Labour supporters that he is as passionate about his words as Corbyn. The odds appear to be against Smith as this morning almost 130,000 Labour supporters won the right to vote in the upcoming election following a continuing court battle. It is widely acknowledged that the waves of new Labour membership back Corbyn.
A poll released last week, which asked participants who would make the best Prime Minister, indicated that 52 per cent supported Theresa May, 18 per cent backed Corbyn, and 30 per cent were undecided. According to the same polling organization called YouGov, a split in the Labour Party would decrease their support to roughly 20 per cent. In a snap election, a separate poll indicates the Tories would claim victory 14 points ahead of the Labour Party.
UK Independence Party (UKIP)
Since the resignation of Nigel Farage as UKIP leader, Stephen Woolfe has been the favorite to assume leadership of the party. Unfortunately for Woolfe, he failed to register before the deadline. Following a vote by a ‘clear majority’ of UKIP’s National Executive Committee (NEC), Woolfe’s appeal citing a technical difficulty has been declined.
Woolfe, who is a Member of the European Parliament (MEP), has stated that he will accept the decision, although he cited ulterior motives for the ruling; namely a prejudice against his platform plank which featured disbanding the NEC and favouring a more decentralized party structure. Amid the controversy, three members of the NEC have resigned in protest. There has long been a rift within the party between MP Douglas Carswell and Member of the Welsh Assembly Neil Hamilton against Nigel Farage and his loyalists, including Woolfe.

After winning 12 per cent of the popular vote in the 2015 election, UKIP now faces a pivotal crossroads and an altered political landscape as their founding purpose has been achieved by Brexit. If able to provide strong, functioning leadership, UKIP may absorb disenfranchised Labour voters seeking an alternative, but who are unwilling to consider Theresa May’s Conservatives. Alternatively, low calibre leadership and poor adaptation may result in bad news for both UKIP and Labour as UKIP supporters may turn to the Tories, who are amassing support by the day.

The likely new candidate is Diane James, the MEP for South East England favoured by Farage. Regardless, a new cogent policy will have to be developed for UKIP to take advantage of the turning political tide. UKIP also needs to remain a strong voice to ensure that Brexit actually does mean Brexit.
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To speak to someone on the ground in London, connect directly with our London lead Ashley Prime at aprime@navltd.com.

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