Daily Insight
Group Economics Macro & Financial Markets Research
04 October 2016
Sterling’s Brexit jitters return US consumer fal Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
UK Macro: Article 50 to be triggered by March 2017 – UK Prime Minister Theresa May confirmed over the weekend that the government will trigger article 50 before the end of March 2017, setting in motion the 2-year process for the country to leave the EU. This means the UK will plan to leave the EU by spring 2019. Up to now, the effects of Brexit on the UK economy from the uncertainty shock was much less severe than expected, perhaps because the actual Brexit looked like a distant prospect. Indeed, the UK manufacturing PMI rose further in September following its rebound in August, helped by the weakness in sterling. It rose to 55.4 from 53.4 August and 48.2 in July (it had fallen sharply immediately after the vote from 52.1 in June). Of course the adverse effects could come at a later point depending on the negotiations and whether the UK and EU will still maintain free trade. If the UK loses access to the single market, that will have real economic consequences. A major point of possible conflict between the UK and EU is the free movement of labour, with the EU stating it is a pre-condition for continued free access to the single market, and the UK wanting to take back more control over immigration. (Nick Kounis) Global FX: Sterling falls as focus returns to Brexit - The announcement on the timing of article 50 triggered further broad based weakness in sterling on Monday, which put currency markets’ focus firmly back on Brexit. As a result, sterling came under heavy pressure and GBP/USD approached the low of 6 July, which was just under 1.28. Sterling weakness was also experienced versus the euro. EUR/GBP rallied to a new high so far this year, a level not seen since February of 2013. This was despite the release of the stronger than expected PMI manufacturing Index. With the market mainly biased towards negative news, a test of the low in GBP/USD is on the cards. However, speculative investors are already positioned for sterling weakness, so we doubt that there is much more room for further weakness. Speculative short positions are at all-time high and net-positions at an all-time low. In addition, the FX options market remains relatively calm, which signals the absence of a panic. (Georgette Boele) Euro Macro & Government Bonds: Spain’s political uncertainty not over yet - During the weekend, the leader of Spain’s Socialist Party (PSOE) Pedro Sanchez resigned. With his resignation the probability of an end to Spain’s political stalemate seems to have risen. Following the June election, Mr Sanchez had refused to back a minority coalition of the centre right Partido Popular (PP) and the centrist Ciudadanos led by acting Prime Minister Mariano Rajoy. Meanwhile, the result of regional elections as well as nationwide opinion polls show that in case of a new (third) election, the PP would win seats compared to the June election, while PSOE would lose. Therefore, the probability that PSOE will support a minority Rajoy-government before the deadline of 31 October seems to have risen. Still, there remains a lot of uncertainty and a new election in December can still not be ruled out. This uncertainty was also felt in the market. Initially, the yield spread between 10y Spanish bonds and German bonds declined. However, as the trading day progressed this upbeat sentiment was lost, reflecting the remaining political uncertainty. At the same time, the yield spread between 10y Spain and Italy widened in favour of Spain to the highest level in 2
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Daily Insight - Sterling’s Brexit jitters return - 04 October 2016
years. This means that, while risks are still elevated, the market is assigning a higher likelihood to a political breakthrough. (Aline Schuiling & Kim Liu)
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Daily Insight - Sterling’s Brexit jitters return - 04 October 2016