Market Drivers January 24, 2017
UK Court rules Parliament must vote
EZ Flash PMIs mixed
Nikkei -0.55% Dax 0.19%
Europe and Asia:
EUR EZ Flash PMI 54.3 vs. 54.5
GBP UK PSNB 6.4B vs. 6.7B
USD Existing Homes Sales 10:00
UK Supreme court ruled that the government of Prime Minister May must seek Parliamentary approval before triggering Article 50 but cable saw little reaction to what was widely anticipated ruling as the pair briefly dipped but then returned to trade above the 1.2500 level.
The UK Supreme court ruling involved two key points for the market. One was the Parliamentary approval issue, but given the 100 seat majority position of the Conservative, the approval appears to be a mere formality. Of more concern to those who wanted Brexit to proceed was the Devolution issue, where the Supreme Court had to rule whether Northern Ireland, Scotland and Wales all had to be consulted before PM May could proceed. On the issue of devolution the Supreme Court ruled in the negative essentially paving the way for the trigger of Article 50 by the March timeline.
Cable initially sold off on the news which in effect removed the last obstacle from UK’s exit from European Union, but then quickly recovered to trade near the multi-week highs of 1.2500. At this point the market appears to have peace with the Brexit issue and investors have settled in a wait and see mode to determine the full impact of Brexit on UK’s economy. Although most experts predicted that the fallout would be severe, with some even forecasting a whopping -8% decline in GDP, the actual UK economic performance since the vote in June has surprised to the upside. Of course many analysts, including your truly, have argued that given the massive devaluation in the pound and the membership in the EU – the UK economy is in effect currently enjoying the best of both worlds as it gets access to the single market but at very competitive costs.
Still, the extent Brexit’s economic impact is not at all clear. Even a formal trigger of article 50 would take 2 years to accomplish during which time UK would still maintain ties to the EU. In addition the situation within the EU is further complicated by the upcoming elections in Netherlands, France and possibly Italy. In all those countries the populist candidates are enjoying massive support and should the populist parties win, the Brexit vote would look prescient as it would confirm the EU is in danger of breaking up anyway. Under that scenario the UK approach to bilateral negotiations could prove to be superior that the current single market model, which explains why cable is trading near multi week highs despite every indication that Brexit will become a reality.