Brexit: Where are we, and where do we go from here?

22 October 2020

Background

On 7th September, Boris Johnson set the recently concluded EU Summit as the final deadline for Brexit. During a speech at 10 Downing Street, he said that if a trade agreement had not been agreed by this date then both parties “should both accept that and move on”. Michel Barnier and David Frost re-convened for negotiations in September, where state aid and Fisheries became the major sticking points, as well as Boris Johnson’s ‘unconstitutional’ internal market bill. The UK took umbrage with state aid, as a matter of “sovereignty”, while the EU, specifically French President, Emmanuel Macron is against abolishing the level playing field in the Channel, that prevents unfair competition.

Over the past six weeks, from the introduction of the internal market bill on the 9th September to the start of the Summit on the 15th October, the pound increased by only 0.3% relative to the dollar, but naturally that doesn’t tell the whole story. The general consensus in the market was that a trade deal in some form would take place, so although the political world was rocked by the ‘illegal’ internal market bill, Sterling took very little notice of political infighting in September and actually rose slightly in the October. This can’t all be attributed to Brexit, however, as the pound was benefitting from a rise in global risk appetite, due to investors pricing in a Biden win in the US election, which should be good news for riskier assets.

EU Summit

Heading into the Summit, it was clear that key sticking points remained and Boris Johnson’s deadline for a deal would not be met. Last Thursday, the first day of the Summit, there were whispers that Brexit talks would continue, and David Frost would speak to Boris Johnson to discuss whether negotiations would continue. The pound fell on early morning news that EC President von der Leyen urged the UK to move on three unresolved issues but ended the day only 0.8% down. The major news came just before midday on Friday, where Boris Johnson told businesses it was time to get ready for an ‘Australian-style deal’, which essentially means no deal. The pound initially fell 0.5% but rebounded quickly. A confirmation of no deal should have pushed Sterling
much lower, but senior EU officials brushed this press conference off as political posturing, and treated Boris walking away as simply another negotiating tactic.

New Deadline

David Frost and Michel Barnier held tentative talks on Monday and Tuesday, until David Frost announced that Brexit talks would restart with a view to have a deal by mid-November. This strange few days for the market can be best described as Brexit fatigue. The markets have been trying to price in Brexit for four-and-a-half years, and have seen multiple ‘hard’ deadlines overstepped, only for Theresa May and Boris Johnson to recant their earlier statements and carry on with negotiations. The pound gained against the dollar on five consecutive days from Friday, when Brexit uncertainty was at its height, because investors saw above the noise and only reacted to concrete news, not unreliable reports from unnamed senior officials, as has previously been the case.

The new ‘soft’ deadline for Brexit is November 16th, the original date for the Berlin Summit before it was postponed due to COVID-19. The only deadline that really matters is 31st December 2020, where the transition period which was ratified on the 31st January will end and the UK will default to WTO rules regardless of any political in-fighting on both sides. A soft deadline before this date is necessary to have a final agreement before ratification, but it is entirely possible that this November deadline can be broken and there still be a deal agreed. The market consensus remains that a deal will take place and an agreement in any form will benefit the pound, which could surpass a high seen in August and push to a higher level last seen in April 2018.