The economic effects of a Johnson Brexit

​​​​​​Today's news headlines:

  • ‘Fierce clashes in Hong Kong as police lay siege to university’. A special tactical contingent attempted to storm Hong Kong University in the early hours of Monday morning following a night of ferocious clashes between protestors and riot police. Protestors defended a bridge near the campus and set an armoured police vehicle on fire. In the meantime, Hong Kong’s High Court ruled that an anti-mask rule introduced by the government was unconstitutional. The rising violence and fears of an even greater reaction from authorities has dented Hong Kong’s economy, with the retail and tourism sectors hardest-hit. (Financial Times)
  • ‘Boris Johnson to woo business with tax breaks worth £1bn’. Both the Prime Minister and Jeremy Corbyn will address the Confederation of British Industry annual conference in London today, with the agenda focused on the delivery of Brexit. Johnson will promise tax relief worth around £1bn a year by 2022-23 upon the safe delivery of Brexit, as well as increasing the employment allowance, which reduces employers’ bills for national insurance contributions. Corbyn will outline his reform plans for the apprenticeship scheme in a bid to tackle climate change. (Financial Times)

A guessing game

The Pound has been stuck in a rut while UK political parties campaign across the country, but the upcoming debates may move the Pound out of its recent range if support starts to concentrate. On a trade-weighted basis, Sterling has traded within a 1.4% range over the past four weeks, having held onto the majority of its 4.5% gains following Parliamentary votes last month. With only three-and-a-half weeks until the public vote, we’ve reached the stage of political debates that can make-or-break a party’s chance of winning. Between now and December 12th, there are an estimated five key debates taking place—two of which will be head-to-head Jeremy Corbyn vs Boris Johnson events.

The first head-to-head will be televised tomorrow, with the second expected to appear on screens on December 6th. The remaining debates will include leaders from other running parties, tackling the public’s questions on the UK’s key issues, including Brexit. Over the weekend, Labour leader Corbyn once again refused to state whether he wants the UK to leave or remain, while Johnson claimed every Conservative candidate has promised to back his deal. Sterling climbed on the London open this morning, reinforcing the view that events supporting a Conservative majority will be Pound positive, while events supporting Labour will be Sterling negative. Although the polls have built a bad reputation in recent years, markets may have to rely on the dodgy data when it comes to gauging election outcomes. This will only set the stage for a sharp reversal if the polls guess incorrectly, just like they did in 2016…

Bottom line: The upcoming UK election is just a brief event in the ongoing Brexit storm. If the Conservatives win a majority and Johnson’s deal is passed, recent market reactions suggest Sterling moves higher. But the larger, more important uncertainty is yet to be realised. The economic effects of a Johnson Brexit are still unknown, and once the UK leaves the EU, there is still plenty of negotiating to do.

GBP/USD

Sterling rose against its transatlantic counterparty this morning as Boris Johnson announced that all Conservative candidates in the UK’s general election had pledged to back his Brexit deal. Election polls also have the Conservatives in a commanding lead over their rivals meaning the bullish outlook for the pair could continue into this week.

GBP/EUR

The week ended on a fairly flat note for the pair as both the Sterling and Euro indices posted moderate gains on fresh hopes of a US-China trade deal. There was also little in the way of economic data to move markets. This morning, Sterling has moved higher against the common currency following positive sentiment surrounding the UK’s general election.

EUR/USD

Friday’s pullback in the US Dollar’s trade-weighted Index meant that the currency pair was able to re-capture the 1.1050 level. Fundamentally, the move seems to be based on a better outlook for the world economy following constructive talks between the US and China. This reduces the appetite for the safe-haven Dollar. Today, several members of the European Central Bank will speak—Vice-President Luis de Guindos and Chief Economist Phillip Lane are the standouts.