12 October 2016

Countdown to the Exit

Despite the excitement being generated the other side of the Atlantic, to which I will return later, it has been the Brexit negotiation timetable that has dominated markets recently.

Markets started taking the referendum vote seriously when Prime Minister Theresa May, at the Conservative P arty Conference, announced that discussions for leaving the European Union would commence no later than March next year. We are now on track to leave in 2019 and the immediate reaction was to put the pound into a tailspin. Sterling reached its lowest level against the dollar since 1985, when it flirted with parity with the US currency.

Shares fared rather better, with the FTSE 100 Share Index trading above 7000 and reaching an all time high, albeit still only a few percentage points above the December 1999 level. The companies that go to make up our benchmark index will generally benefit from a weaker pound, principally through the conversion of profits earned overseas in stronger currencies into sterling. Of concern to the foreign exchange markets is the effect that a hard Brexit might have on our economic fortunes.

So far there is little sign that adverse conditions will set in, but much will depend on how the financial services sector behaves. Some international banks, including Goldman Sachs, have indicated that more focus will be put into European operations if Britain is unable to secure satisfactory terms for its banks and other financial operations to trade within the EU. At the core of this is the so-called passporting regime which allows cross border selling of financial products within the EU. The fact that this is due to be replaced with a set of rules based around acceptable regulatory regimes is being ignored for the present.

Time will tell, of course, but the belief is that the financial infrastructure in London far exceeds that available elsewhere in Europe, though few will doubt that both Germany and France will be keen to take business from the City of London. That said, the smart money is on New York being the prime beneficiary of London losing its preeminent role in the European time zone, rather than Paris or Frankfurt.

Some weeks ago I was remarking on the first of the US Presi dential candidate debates. The second took place recently, with Donald Trump faring better than before, despite some unfortunate revelations just ahead of his clash with Hilary Clinton. With the betting now swinging firmly in favour of a Clinton victory, Trump has turned his firepower on his erstwhile supporters from within the Republican establishment. No one can accuse this particular contest as being dull. What the result might mean for markets is anybody’s guess.

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