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28 March 2019

Brexit: Endgame?

29th March 2019 was meant to be the date that the UK left the EU. Following John Bercow's announcement that the Prime Minister could not resubmit her deal to be voted on unless it was substantially changed from the previous one, Theresa May promised to resign if her twice-rejected deal was accepted.‚Äč The EU had previously agreed that they would allow an extension to Article 50 until at least 12th April for the ‘new’ deal to be approved in Parliament, with the UK then forecast to leave the EU on 22nd May.

It’s been over 1,000 days since the referendum and yet we are still unsure if or when we will depart. Behind all this daily noise, the UK economy has held up remarkably well, despite the Treasury initially warning that leaving the EU could significantly damage the economy. UK growth has, however, remained at its slowest since 2012 with the economy expanding a mere 0.2% in the last quarter. The Bank of England noted that lack of economic expansion is down to reduced business investment, which is due to nervousness surrounding Brexit. Over the past two years international companies have expended considerable resources in planning for Brexit. For example, Bank of America have spent £306m to relocate staff from London to its new preferred headquarters in Paris. Only last year, the group merged its UK and Irish subsidiaries, which resulted in 125 jobs moving to Dublin.

Despite the outflow by major companies, UK unemployment is at its lowest in 45 years, with 76% of the working-age population currently employed. Real wages, which have shown growth since the financial crisis in 2008, have started to depreciate since the beginning of the year as the fall in Sterling has filtered into consumer prices.

The US Federal Reserve (Fed) has indicated that it will not raise US interest rates for the remainder of 2019 and will maintain its target of 2.25% to 2.5%, citing trade uncertainty, lower household spending, declining investment and economic slowdown. From May until September, the Fed will start to slowly reduce the swollen balance sheet which was a result of bond holdings purchased during its quantitative easing programme. Fed Chairman Jerome Powell commented that “there was a positive outlook for the rest of the year, with the unemployment rate under 4% and inflation below the central bank’s 2% target. But we are also very mindful of what risks are which include slower global growth and no resolution on either Brexit or US-China trade talks”.

Global tighter monetary policies saw the difference between the US three-month and ten-year yields turn negative for the first time since August 2007, causing the curve to be inverted. Where a short-dated yield begins to rise above longer-dated yields, this can be an indicator of a coming recession and rate cutting cycle. Government bonds began to rebound as investors moved into Treasuries from riskier asset classes. The feelings were mutual across the globe as poor manufacturing data from Germany saw its ten-year Bund yields fall into negative territory, falling three basis points, followed by Japan’s benchmark dropping to its lowest level since November 2016.

Given all the prevailing uncertainty, we would not be surprised to see an increase in equity market volatility over the coming months.  

Victoria Hill, Investment Executive
Brexit: Endgame?
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