BoE after Brexit
Politics
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As the petition of 4.1 mln
people for a new referendum was rejected by UK government, we are moving to a warming
up phase for exit talks and negotiating of best agreements with EU possible
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Theresa May made it to become a
new Margaret Thatcher
-
UK is working and lobbying hard
during preparation phase to secure good starting position for official exit
talks
-
Article 50 likely to be
triggered next year, but any surprise is still guaranteed
-
Highly unlikely, the UK would
use Article 50 before they feel and are ready for the talks, as they would have
only 2 years to complete them. If not, they will be a third party country to
EU.
Economy
-
The principal two industries
the UK economy is based on are Finances and Real-estate. I believe there is no
need to comment on current developments there.
-
Not only GBP suffers but recent
UK data are turning sour as well. A good example was the June Construction PMI
that showed first contraction in 40 months with lowest reading since June 2009.
The Housing activity dropped in June as well, to lowest level since Dec 2012.
-
Due to Brexit the S&P sees:
UK GDP to
decline 1.2% in 2017 and 1.0% in 2018
BoE lowering
rates to 0.0% before the end of the year
They also cut
the country rating by two notches to AA with negative outlook.
-
Government is looking at
lowering the corporate tax to 15% from 20%, to support the business and keep
the employment steady
-
EU is pushing UK to start
negotiations with immediate effect to reduce uncertainty. The message from
Brussels was clear, no cherry picking will happen. On the other hand, in order the
UK keeps the access to free market, they would need to accept Four Freedoms of
EU: Free movement of goods, capital and workers, and Right to establish and freedom
to provide services.
-
Trade agreements – re-focussing
on non-EU trading partners
-
Hedge funds and sovereign funds
have already started to look around for possible opportunities in UK.
Bank
of England (BoE)
Stability Report (released after Brexit referendum) - Brexit risks materializing,
outlook challenging, BoE cut countercyclical capital buffer, expecting economic
volatility, commercial real-estate risks present, investment decisions being
delayed.
Carney (BoE) – BoE to provide
substantial FX liquidity, to support jobs and growth, ready for Article 50
trigger and to ban banks from using extra capital on dividends. The Current account risks related to GBP moves and capital flows,
weak GBP to support exporters, actions to be focussed on domestic economy.
The Current and Capital account as well
as the chronic Budget deficits are huge problem for UK.
Let’s have a look at an interesting
formula for UK Current account:
Sum of FDI + portfolio investments +
current account = 12.8% of GDP. Portfolio investments and FDI inflows more than
offset the Current account deficit of 5.1% GDP, but what if the inflows
reverse? UK is still able to finance its current account with foreign money,
but likely would need to decrease the consumption at certain point as the
inflows reverse also on lower yields.
The market may still be underpricing the
upcoming easing despite the GBPUSD printing the 85 week low below 1.2800. We
may be looking at 25 bps rate cut in July, one more in August. Definitely, BoE
will come up with rather decent QE (maybe additional GBP 100 bln including
buying corporate bonds).
Next policy meeting is on Thursday July
14, where we will see whether Governor Carney will keep his word and BoE cuts
the rates. The market is assigning the 74% probability of such a step, but
other measures, comments and Minutes will be equally important.
GBP
– what’s next?
Macro view – lower rates, QE with
declining FDIs will be putting pressure on GBP. What about George Soros being
right about BoE again and seeing cable below 1.1500 level?
Mohamed El-Erian was out last week saying
the GBP can fall to parity to USD, if there is no good Brexit plan that would
secure sufficient free trade deal with EU.
Good luck Champs!
Mr Hawk
DISCLAIMER: This material was created
for informational purposes only and represents the Land of Trading teams view
on past and current economic and capital market environment. It is not and
shouldn´t been viewed as an investment advice and the creator of this material
shouldn´t been hold liable for any loss resulting from action where despite
this disclaimer someone would consider this material as
an investment advice.
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