More Brexit bluster…

More Brexit bluster…

Shane Canavan Weekly bulletin September 2018
Friday brought about the largest one-day fall in sterling since the general election 15 months ago, as the possibility of a no-deal Brexit scenario increased.

In failing to make any meaningful progress at an informal EU summit, the prime minister’s press conference on Friday saw her double down on her Chequers plan. Accusing her counterparts of lacking respect, she directly challenged EU leaders to change their negotiation position or risk the UK crashing out of the EU without a deal – something she confirmed she stood ready to do.

The apparent stalemate has come as a disappointment to markets, which had welcomed the more conciliatory tones that preceded the summit. It would appear that the catalyst was a miscalculated speech by the prime minister to EU leaders in which she struck a rigid position in presenting her Chequers plan as the only basis for a deal. This came despite the well-documented reservations of her audience, who took the view that yet another opportunity to make meaningful progress had been wasted. The EU’s response, swiftly and unambiguously delivered by Donald Tusk, proclaimed her Chequers plans to be all but dead, comments which seemed to have blindsided the Prime Minister.


While an uncompromising stance is likely to be welcomed at the upcoming Conservative conference, the prime minister is running out of time for a deal to be agreed by the EU imposed deadline of mid-October. This now looks almost certain to be missed, and while markets remain confident that a deal will be agreed, it is likely that any such deal with come at the eleventh hour. In the meantime, further volatility is all but guaranteed.

A falling pound, if not temporary, will be unwelcome news for the Bank of England, who this week saw inflation unexpectedly spike to a six month high of 2.7%. Yet with inflation expected to fall to the 2.00% target by 2020, it is likely the Bank of England will continue to look past short-term inflationary pressures and keep the Bank rate at its current level until there is greater clarity on Brexit.


The Eurozone PMI number for September was a healthy 54.2, which would suggest robust economic growth for Q3. However, it should not go unnoticed that this was a four month low and shows signs that concerns are mounting around Brexit, protectionism, slowing global growth, and a strengthening euro. In a speech last week, Draghi even went as far as to highlight growing protectionist measures as a direct threat to the Eurozone’s economy.

In a sign that the ECB has a firm eye on the eventual normalisation of monetary policy, Benoit Coeure, a member of the ECB Executive Board, suggested that while the ECB intends to keep interest rates on hold through the summer of 2019, the bank may provide some forward guidance in the near future. However, given the ECB’s track record of premature monetary policy decisions, it is very unlikely that any such forward guidance will be too prescriptive. Nonetheless, such comments only reaffirm the markets’ expectations that policymakers will look to taper their balance sheet later this year.

US Markets

In contrast to the Eurozone, concerns over protectionism do not appear to have registered in the US markets, which go from strength to strength with equity markets reaching record levels. Interestingly, rising interest rate expectations, following data showing wages growing at their fastest pace for nine years, have apparently failed to have dampened sentiment.

The week ahead

Looking to the week ahead, we have Q2 GDP figures for the US and UK being released on Thursday and Friday respectively. Look to UK data in particular, where there is the possibility of an upward revision. Wednesday is also likely to see the Fed undertake a further 0.25% increase in interest rates. Thursday will see the ECB release their economic bulletin, where analysts will be looking for signs of forward guidance, which will be followed on Friday by inflation figures which are unlikely to remain unchanged.

For more information, please contact Shane Canavan, Director at JCRA, at Shane.canavan@jcrauk.com.


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