Brexit update 1 October 2017

While the UK’s new favourite “gaffer”, Boris Johnson, was ticked off by a senior UK diplomat for quoting Kipling during his visit to Myanmar, former British colony, Burma during Kipling’s time. Mrs May was in the here and now, preparing for the Tory Party Conference. She is due to address the conference on Wednesday 4th. A clear and must do opportunity to reinforce her authority and control over Brexit negotiations, the party and government policy across the board.

After Mrs May’s speech in Florence, the following week saw a change in the mood of the negotiations.  Where before the speech, the general feeling within the EU surrounding any previous mention of a transition period was one of scepticism and reluctance to even consider a transition period. Perhaps a negotiating position?

So, what did the main protagonists have to say about the speech and the proposed transition period?

Michel Barnier said the speech showed a “constructive spirit”  to move quickly and that he looked forward to David Davis explaining the “concrete implications”.  But, he made clear that the future relationship would need to include for a balance of “rights and obligations” as reported by the Independent newspaper. He went on to say that;

“we need to reach an agreement by autumn 2018 on the conditions of the UK`s orderly withdrawal from the EU. The UK will become a third country on March 30th 2019” and that the “sooner we reach an agreement on the principals of the orderly withdrawal”. 

A clear message that an agreed orderly withdrawal being the key to unlock the discussions on a future trading relationship which is the cornerstone of Mrs May`s Brexit strategy.

Further he said;

 “Our ambition is to find a rapid agreement on the conditions of the UK`s orderly withdrawal, as well as on a possible transition period”.

In saying that, a transition period seems definitely on the cards.  A stark difference to the EU`s previous stance. More from the Independent here.

EU leaders had much to say in response to Mrs May`s speech as reported in the Sunday Express.

On citizen`s rights, one of the 3 key areas in the divorce settlement, EU Brexit coordinator, Guy Verhofstadt said Mrs May`s proposals that EU citizens would need to register with authorities was “out of the question” and went on to say that;

“it can never be allowed for the European Courts of Justice to be replaced by another dispute settle mechanism during our future relationship”.

A clear indication of the difficulties ahead. Manfred Weber, chair of the EU parliament`s leading group, the EPP said similarly, when he tweeted that “Money is one thing, but people`s everyday life is more important.  EU citizens in the UK need legal certainty”

On Ireland and border issues. While Mrs May`s speech did not even hint on how the various issues would be dealt with, Mr Verhofstadt said;

I didn`t hear yet how the UK government wants to avoid a hard border or physical checks on the Island of Ireland.  This only seems possible if Northern Ireland remains part of the Customs Union” 

On the Brexit divorce bill, the single-most thorny issue, Mrs May, in her speech said;

 “I do not want our partners to fear that they will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave. The UK will honour commitments we have made during the period of our membership.”

She also said

“we would want to make an ongoing contribution to cover our fair share of the costs involved”.

Mr. Barnier said in positive response;

“The UK recognises that no member state will have to pay more or less because of Brexit. We stand ready to discuss the concrete implications of this pledge”.

So, all-in-all, a more conciliatory tone tempered by hints of scepticism from EU negotiators and Brexit coordinators.

Where are we in markets terms?

Friday 29th September close, GBPUSD opened the week at $1.34924, made a low for the week of $1. 33426 and finished the week at $1.33981, currently capped by a negative trend-line on the 1-hour time-frame. Supported in the 1.333 range and rallied Friday on disappointing US Consumer numbers after the Pound declined earlier on UK GDP`s 2nd quarter print, signalling the weakest annual growth since 2013. The Pound was approaching a 4% climb vs the USD since the start of the month. Still a USD story, but with some help from better data releases during the month. Retails in particular and in the face of lack of progress in Brexit negotiations and Mrs May`s political woes generally. Hawkish tones from the BoE on the possible need to hike cash rates in the near future (possibly as soon as November) helped Sterling along the way.

FTSE 100 closed Friday up 0.64%.

The UK gilts surged after the country’s gross domestic product (GDP) for the second quarter of this year, fell to 1.5 percent y/y, compared to expectations of and from previous 1.7 percent y/y. However, on a q/q basis, it remained unchanged from 0.3 percent in Q1. The yield on the benchmark 10-year gilts, fell 2 basis points to 1.35 percent, the super-long 30-year bond yields slipped 1-1/2 basis points to 1.91 percent and the yield on the short-term 2-year also traded 1 basis point lower at 0.45 percent, with yields recovering slightly into the close.


The Pound is clearly weighed by lack of real and conclusive agreements so far in Brexit negotiations and UK politics.

The 4th round of phase one negotiations are due to start in October. Round 3 has resulted in no agreements so far but there has been a renewed purpose since Mrs May`s speech and some progress has been made. The European Council will meet on October 19th/20th to decide whether enough progress has been made to allow negotiations to move on. If not, then the decision will be made at their next meeting December 15th for talks to progress from “divorce” issues to trade discussions and the UK`s future in the single market.

The Engineers/oil rags:

If the current rounds of talks fail to conclude with agreements on negotiations, it may be necessary for the “engineers”, ultimate decision makers, (heads of EU member states) to somehow step up to settle disputes between the “oil rags” (negotiators) to avoid stalemate and a stalling of talks altogether. We need to look out for any statements or rumours on that one.

The Politics:

Mrs Merkel is currently attempting to form a coalition government.  So far, it is unclear how any coalition might look and no firm timeline is available for a deal.

The UK`s Conservative Party Conference has begun today 1st October and represents Mrs May`s big chance of cementing unity amongst the ranks.  Her speech is due on Wednesday 4th 10am to 12:30 BST. Will her speech signal the broad support of Party members?  Will it be Pound positive?

Other key speakers:

  • Monday 2nd October. Chancellor Philip Hammond, one of the key figures after Mrs May`s job.
  • Tuesday 3rd, 10am to 12:30. Home Secretary Amber Rudd, another key figure wanting Mrs May`s job. 14:00 to 14:50, Brexit Secretary, David Davis a key contender and well placed for the job of Prime Minister. Crucially, 14:50 to 16:00 BST, Foreign Secretary, Boris Johnson who has voiced concerns over a transition period saying it should not last a “second” beyond 2 years.  Will he repeat this and his 4 other demands during his speech and what reception will he enjoy after his gaffe during his trip to Myanmar, where he was “ticked off” by the UK`s ambassador to Myanmar upon quoting Rudyard Kipling?  Perhaps he should take note of another Kipling quote:

“for the female of the species is more dangerous than the male”

  • Wednesday 4th, Mrs May and her big chance to capitalise on her Florence speech. 10am to 12:30 BST.

Full agenda of the Conservative party conference is here.

This could be a difficult ride for Sterling bulls and bears in the coming week. All potentially bullish/bearish GBP.  Expect plenty of twists and turns.

“The Brexit Review” is a running series, check out the prior posts here.

Si Heath
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