Brexit indecision causing market tunnel vision

The UK government remains deeply divided on what a Brexit deal should look like even as the eleventh hour draws near.

Earlier this week the shadow Labour Brexit minister Keir Starmer said that Labour would torpedo a UK free trade deal that is now being backed up EU Chief negotiator Michel Barnier. It raises a big question mark over the prospects of the deal if it came into the House of Commons for a vote. 

The Canada-style proposal envisages no tariffs on imports and nearly avoids checks on imports. At the same time extreme Tory Brexiteers find Starmer’s ideas of closer ties with Europe unacceptable leaving little hope for middle ground.
 
Markets remain jumpy over the issue, particularly forex markets where the pound is pushed lower every time it raises its head a bit with the threat of the no-deal Brexit remaining the main concern. However, despite not being able to form a coherent trend higher the pound has also not seriously declined over the last year, instead trading in a bit of a tunnel between 1.1 and 1.15 against the euro. 

And, while Teresa May is frantically working to ensure favourable deals with other trade partners such as African and Asian countries, most notably China, the government is in the process of drawing up a plan B, a contingency that assumes a hard Brexit.

 As the Treasury gets ready for the UK autumn budget, Chancellor Philip Hammond is expected to avoid large-scale tax increases and spending cuts. 

The stock market is finding it harder and harder to trade upwards in the face of a looming no-deal Brexit. While on the one hand the slight weakening of the pound is helping UK exporters and an overall bouncy mood in US stock markets is also providing some upward lift, overall too large a segment of companies is going to be affected by Brexit for the FTSE 100 to hold its ground. 

On a six month basis the index has declined 7.22% compared with the Dow Jones Industrial Average which has bounced up 4.8% during the same period.

There is also the danger that many overseas investors are starting to sit on the side lines to see what the outcome of all this wrangling will be. There are very obvious fears that a drop in the pound occasioned by a hard Brexit or even an unfavourable deal could wipe out gains between now and March. 

This is focusing the minds of non-sterling investors including overseas funds, and removing some important buying activity from the market.


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