Article / 22 September 2016 at 12:00 GMT

Saxo on Brexit: When the phoney war is over

Managing editor, / Saxo Bank
  • Friday marks three months since the decision to leave the European Union
  • Brexit has not triggered the anticipated economic slide
  • Sterling plunge of circa 20% from June 23 high has buoyed economy
  • UK in something of a phoney war as Article 50 yet to be invoked
  • Westminster likely to have to undergo tough negotiations with EU partners
  • Hangzhou G20 meeting gave PM Theresa May crash course in UK isolation
  • London's negotiation weakness highlighted by Hinkley deal
  • Does Hinkley deal raise prospect of UK becoming 51st state of China?
London has entered into something of a phoney war since the decision three months ago
to leave the European Union, but the cleanup will still have to come eventually. Photo: iStock

By Martin O'Rourke

Three months on from the UK's seismic decision to leave the European Union on June 23, we are absolutely none the wiser as to what this will eventually entail.

New prime minister Theresa May has hid behind the mantra 'Brexit means Brexit' since her hasty election in July as last woman standing following the dismal performance of her leadership rivals epitomised by the capitulation of Andrea Leadsom (remember her?) following a gaffe-laden leadership campaign.

But the mantra laid bare is absolutely meaningless. If no one understands what Brexit is, then the phrase is as unfathomable as a black hole — a pit of never-ending emptiness with nothing to hold onto or on which to establish a framework.

May is no idiot, of course, and the phrase has served its purpose of partly appeasing the Brexiteers who fear their vision of the future UK will dissolve in front of their eyes (in large part, it almost certainly will), differentiated her from the Cameron regime, and bought her time that has allowed her to enjoy a honeymoon period since she came to power.

Oh! the irony

That has in part been helped ironically by the precipitous plunge in the value of sterling which from a June-23 high of approximately 1.50 against dollar, fell to the 1.27 area within two weeks from where it has barely recovered and currently resides south of 1.30.

That plunge has left a scar that enabled France to climb above the UK in GDP terms to fifth in the global league when sterling hit its nadir. Nevertheless, whatever the blow to prestige, the subsequent boost to exports has helped the UK economy overcome the first wave of post-Brexit angst and even seen confidence rebound from the lows in the immediate aftermath.

The GBPUSD plunge has been traumatic dipping once again below 1.30 this week,
but has ironically helped the UK economy through the post-Brexit vote period
Source: SaxoTraderGO

That has enabled FTSE 100 companies in particular — given that the index is made up largely of international companies denominated in foreign currencies — to soar from close to the 6,000 mark to a high in excess of 6,900. It has since settled at around the 6,700 area.

But even the more UK-representative FTSE 250 has managed to claw back its losses from the dark days at the end of June when it dived beneath 15,000 to not only shoot past the 17,250 mark on June 23 but continue to climb to beyond 18,000 by the first week of September.

That has left those who voted for Brexit smugly telling Remainers "we told you so" as the well-documented predictions of tough times ahead (and I'm more than willing to admit that I was — and still am — in that camp) failed to materialise.

FTSE 250 has clawed back all its post Brexit-vote losses

Source: SaxoTraderGO

But, for those who continue to believe Brexit will ultimately prove to be a massive challenge for the UK economy, Bundesbank president Jens Weidmann added ballast, warning this week that London could lose its status as the number one financial hub in Europe — echoing the thoughts of Saxo's head of equities Peter Garnry in June — and said that "Britain hasn't even applied to  leave yet."

"To assume on the basis of the developments so far that there wont be any negative consequences would be to draw false conclusions," he added.

Weidmann's sobering assessment in tandem with May's suggestion last weekend that article 50 of the Lisbon Treaty could be invoked in the early part of 2017 was enough to send GBPUSD once again beneath the 1.30 trapdoor at the start of the week and also had a dampening effect on the FTSE with the FTSE 250 sliding from above 17,925 to the 17,850 area before rebounding on the back of yesterday's dovish central bank performances.

It also points towards the fundamental vulnerability that still underpins the UK economy with some positive data undermined by the government's deficit-cutting plans falling further off target this week. That had four out of five UK managers this week predicting Britain will be in recession within the next 18 months and sent small-business confidence to a four-year low predicated primarily on the fear that foreign direct investment might dry up.

Browbeaten May

FDI was certainly one of the themes that dominated the G20 meeting at Hangzhou in China earlier this month. Japan set the ball in motion by issuing a sharply worded statement that threatened a significant exodus of Japanese corporations from the UK if it no longer acts as its gateway into the European Union.

The irony that this might, for example, see the closure of the Nissan factory in Sunderland where 61% of the voters elected for Brexit will not have been lost. The plant will go up against other European-based Nissan plants to bid for new business at some point next year, but, with the UK's new trade relationships yet to be established and with the possibility that tariffs could form the basis of any new relationship, there is speculation that the Sunderland plant might not even be allowed to compete for new business.

The implications for the 7,000 strong workforce need not be spelt out.

If that wasn't already leaving prime minister May feeling like she was being strung out on board her flight into Hangzhou, the ambush from US president Barack Obama will most certainly have done so after he made it abundantly clear that the UK would not jump the queue for a US trade deal and reiterated his belief that Brexit was a mistake.


You definitely need a hat to protect yourself from China's ferocious summer sun but Theresa May probably needed one of the tinnier variety at this month's G20 in Hangzhou. Photo: iStock

But perhaps the biggest challenge facing May in China was the difficult meeting with Xi Jinping which would have most certainly touched on the controversial Hinkley Point nuclear project. May placed the agreement on hold in the immediate aftermath of her accession, stating that she wished to review the deal amid concerns over national security.

Lo and behold that, some 10 days on from Hangzhou, May gave the deal the green light despite warnings from experts that it will add £230 to the annual bill of the average UK household and ties post Brexit-vote Britain to a unit payment (£92.50/megawatt-hour) that is twice the current price in wholesale markets.

Splendid isolation

Would London have been quite so quick to cave in without having its negotiation position gravely compromised by the vote on June 23? It is speculation of course and the Hinkley deal was in the works many years before Brexit entered the lexicon. But, with Chinese investors now lining up to bid for the National Grid, Britain is starting to enter an "Emperor's New Clothes" scenario in which, despite the strident rhetoric, the façade is paper thin and the crown jewels look like they could be up for grabs.

While it is perhaps facetious to claim the UK is on its way to becoming the "51st state" of China, the position in which London finds itself is invidious as each desperate move to demonstrate it is a world player sees it cede just a little more ground. (Westminster does of course have form here after Gordon Brown sold half the country's gold reserves in 1999 at a knock-down price when he was chancellor in Tony Blair's first term). 

If we need a precedent, the China-Russia gas deal of 2014 saw Beijing arm-wrestle an isolated ally-seeking Moscow into a 30-year deal that has increasingly come to favour the Chinese particularly in light of the collapse in oil prices since the summer of 2015.

No one is quite suggesting London has boxed itself into the naughty corner occupied by the likes of Russia and Iran over the last few years, but its outside-looking-in position can only hurt its ability to get the kind of deals it wants, especially if the EU takes a hard stance.

While the latter could have repercussions for the whole European project if Brussels overplays its hand, a disintegrating Europe (witness Angela Merkel's refugee-crisis travails in Germany) would smack of a 'cutting-off-the-nose-to-spite-the-face' scenario and plunge the continent as a whole into a depression that the UK would hardly avoid.

Despite the claims that the UK could nab itself a tailor-made solution on an EU trade deal including access to the single market, chancellor Philip Hammond has already accepted that membership is not consistent with the UK's avowed aims on immigration (even if May tacitly accepted the kind of deal sought by the Brexiteers on immigration was not in the pipeline when she rejected the possibility of an Australian-style visa points system).

Pharmaceutical giant GlaxoSmithKline meanwhile is already working on the assumption that the UK will no longer have access to the single market. CEO Andrew Witty this weekend in Singapore said that "no change of any rule has taken place and nothing has happened in the real world and for a company like GSK, nothing has changed ...and it is unlikely that anything will change for at least another two or more years or after when article 50 is executed and negotiated."

So far so good, but then comes the coup de grace. "When that process begins, the areas that are most of interest to us are regulator," he said, as reported by BBC Radio 5's 'Wake up to Money' programme. "Will we have more regulation? We don't know. Will we be in the single market? We're working on the assumption that we are not."

Of course, it is the job of businesses to be prudent and work on worst-case scenarios but the GSK position is probably being mirrored up and down the country. What it means is that the rose-tinted cherry-picking scenario depicted by many of the Brexiteers simply will not materialise. The long hard road instead lies ahead.

And what of the Brexiteers themselves? We've already documented how quickly the Brexit coalition fell apart with Boris Johnson's astonishing fall from grace matched by the exit left from UKIP leader Nigel Farage. Leadsom's light meanwhile shone brightly for all of a week perhaps and then came crashing to the ground as her leadership campaign foundered on some ill-judged comments about May's childless marriage. 

Knife-twisting Michael Gove, meanwhile, died by his own rapier after brazenly betraying Johnson.

The Brexiteers are now regrouping, however, and through the 'Change Britain' campaign group, the newly-appointed foreign secretary Johnson and Gove are once again coalescing to push the Brexit agenda and the quicker invocation of article 50.

It leaves May in quite a vulnerable position. Clearly she decided to have the likes of Johnson and Brexit minister and anti-EU veteran David Davies 'looking' out of the tent rather than 'looking' in (yes - we have taken poetic licence there) by making them part of the cabinet but her majority is just 17 and she may pay the price for not gambling on a snap election when her stock was at its highest and patriotic fervour spurred (some of) the nation.

UKIP is also reuniting under a new leader (although it is hard to see a Farage-less UKIP having quite the same presence) and the Scottish National Party under the formidable Nicola Sturgeon continues to push for a second referendum on independence even if the people are lukewarm on the idea.

May knows her honeymoon is about to end. An end to the phoney war on the Brexit vote is also nearing its end. The fallout from the Brexit vote so far has been considerable in political terms but is yet to really take hold in economic terms. We're likely to enter that phase in the next 6-12 months.

Her honeymoon period is over and that of post
Brexit-vote Britain will be over soon too. Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank
26 September
Krunil48 Krunil48
A lot of speculation but at the end of the day the UK is allowed to democratically vote for whichever party best represents its views in its continueing relationship with the EU and as a direct result of its decision to leave the EU.
26 September
Martin O'Rourke Martin O'Rourke
Hi Krunil48. Yes of course you are right on the speculation and I think we really won't have a comprehensive answer on Brexit until the process of disentangling the UK from Europe begins. Obviously I have a position on this (and this is my opinion, not necessarily the bank's) which forms the framework for my view and I am yet to be convinced that Brexit is a good thing for the UK. This process does indeed need to go to a logical conclusion as you say. It all depends now whether we got a 'soft' or a 'hard' Brexit.
27 September
Krunil48 Krunil48
Hi Martin. Just my opinion, but above this Chinese deal, in the public perception, appears a large question mark, as of a Tom & Gerry cartoon. In terms of a soft or hard Brexit those who voted out plainly voted they wanted an end to EU control of UK borders, therefore - 'hard'. This is the terms of whatever deal is now done between the UK and the EU on immigration and trade and incidentally, what other countries around the world allow the free movement of people in return for trading with them? If Theresa May negotiates away the control of immigration in return for access to EU markets she will be seen as a weak leader and will damage Conservative credibility for the forseeable future.
04 October
Martin O'Rourke Martin O'Rourke
GBPUSD has hit a fresh 31-year low after UK PM May's comments this weekend that point to a start of the EU-exit process by March 31 and a so-called 'hard' Brexit.


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