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BRITISH POUND AND THE HARDSHIPS OF BREXIT

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Elizabeth Belugina

By  Elizabeth Belugina, the Head of Analytics Department at FBS

For more than a year Brexit has been tormenting authorities and businesses both in the UK and the European Union. This topic is the constant driver of the currency market, although its effect on the British pound during this time hasn’t always been the same.

Right after the Brexit referendum in June 2016 the pound fell versus the US dollar losing about 20% in 4 months– this decline still hasn’t been erased. Back then the news of Britain’s future divorce with the EU came as a shock for the market and had negative impact on the sterling. Now the framework has changed. It’s widely accepted that Brexit is inevitable.

The longer the terms of Britain’s departure remain unclear, the harder it is for British economy: although William Congreve said that uncertainty and expectation are the joys of life, business would like to get rid of this particular source of trouble. As a result, now the situation turned by 180 degrees: delays to Brexit now hurt the pound.

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All eyes on December

The timeline for Brexit has been set: the UK should leave in 16 months – on March 29, 2019. A lot has to be done before this time comes. One of the milestones is the EU summit on December 14-15. According to Donald Tusk, the President of the European Council, Theresa May’s government has to make progress on the Brexit bill and the Irish border issue by the leaders’ meeting in December. If it doesn’t, it will lose a chance to push talks about future trade ties and they could be delayed until next March.

The first stumbling point is the question of money: the exit from the EU is not going to be free. As a member of the EU, Britain signed up to budget payments and other liabilities such as pensions for EU civil servants that stretch into the future.

Europe asked Britain to pay at least 60 billion euros ($71 billion). At the same time, European officials understand that British public will likely be appalled by such amount. The actual divorce fee will likely be between 45 and 55 billion euro. Theresa May’s cabinet is already not at its best: a couple of ministers fell on their faces, and discontent with May herself is increasing.

The second big negotiations issue is the question of the Irish border. Ireland, a member of the EU, is against any kind of border on the island after Brexit as it will remind about the previous years of violence and hurt Irish economy. However, as the UK is leaving the European single market, a policed frontier and customs controls will have to be introduced.

According to Brexit Secretary David Davis, a deal with the European Union is the most likely outcome of talks, although the British government was prepared for no agreement with the bloc. The country’s authorities need to make a significant offer to the EU to convince it that it’s serious about paying what it owes and yet make it OK with the voters.

Will Brexit be hard?

Elizabeth Belugina, Head of Analytics Department, FBS

Elizabeth Belugina, Head of Analytics Department, FBS

There are two shades of Brexit – a soft one and a hard one. The first option involves Britain staying in the EU single market and customs union. The second option means that these ties will be severed.

As the EU is Britain’s largest export, it’s clear that hurdles to trading with the bloc will hit the UK economy. In addition, a fallout from hard Brexit will include a disruption of industrial supply chains, debasement of London as the global financial center and public-sector issues.

The impending Brexit has already resulted in heightened inflation and government’s borrowing. The research of the Centre for Economic Performance (CEP) shows that every British family loses on average 404 pounds ($534) a year after the Brexit referendum. In other words, higher inflation makes an average worker lose a week’s payment in a year. According to the UK Treasury department, hard Brexit may cost from 38 to 66 billion pounds (47-81 billion dollars).

The government is not standing still. Theresa May has recently announced 4-billion-pound spending on research and development and regional growth strategies, setting out plans to help the economy grow after Brexit. Will this be enough? That is the question.

Impact on the pound

The flow of various statements about Brexit is very intense. This can be very confusing for GBP traders. One day there’s hope, the other day it disappears.

The fate of the pound will depend on how soon the UK and the EU can move on to discussions over their future trading relationship. The British currency will strengthen on any signs of a mutual understanding between the EU and the UK. Hurdles to Brexit will send the pound down.

It’s also necessary to take into account the EU side of things. If German political problems remove Angela Merkel from dealing with Brexit, it will make life for the sterling harder, as another European leader – France – pursues a harder line in the talks.

One has to realize that success of Brexit talks can be only a short- and medium-term driver of the British pound. Provided that December brings fruits of agreement between the sides, year-end targets for GBP/USD are in the area of 1.3600/1.3500. As for the more distant future, the cost of Brexit is still only a subject of guesses, so uncertainty remains. The year of 2018 will be key for the British currency. London and Brussels will have to reach an agreement on trade by October for it to be ratified by all European parliaments before the actual Brexit in March 2019.

In the months ahead, demand for the GBP may decline not only because of concerns about the UK economic future but also as the Bank of England will likely fall behind other regulators in monetary policy tightening. This is already starting to be true. While the Fed raised its policy rate by 1 percentage point in 2 years and the ECB is slowly reducing monthly stimulus, the BOE managed only to withdraw the emergency rate cut made in August 2016. If the UK economic health deteriorates, the central bank may even have once again to resort to rate cuts. It means that from the yield perspective the pound will look less attractive than currencies of the countries where banks are raising rates. The sterling may also suffer against currencies with lower debt. Political issues like the call for new elections will provoke negative reactions in the pound as well.

In these circumstances, a well-known mantra comes to mind: keep calm and trade the GBP as the Forex market allows traders to make money both on increases and declines of this currency.

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Energy stocks drag down FTSE 100, IG Group slides

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Energy stocks drag down FTSE 100, IG Group slides 1

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

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Wall Street bounce, upbeat earnings lift European stocks

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Wall Street bounce, upbeat earnings lift European stocks 2

By Amal S and Sruthi Shankar

(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.

The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.

All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.

Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.

Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.

Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.

The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.

“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.

The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.

“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.

Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.

Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.

Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.

Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)

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Miners lead FTSE 100 higher on earnings cheer

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Miners lead FTSE 100 higher on earnings cheer 3

By Shivani Kumaresan

(Reuters) – UK’s FTSE 100 rose on Wednesday as miners gained after a strong production forecast from BHP Group, while encouraging updates from luxury brand Burberry and education group Pearson drove optimism about the earnings season.

BHP Group Ltd climbed 2.8% after it forecast record iron ore production for fiscal 2021, helped by high prices for the commodity. Other miners Rio Tinto, Anglo American and Glencore rose more than 2%.

Global markets rallied in anticipation of more fiscal spending as Joe Biden prepared to take charge as the 46th U.S. president.

“There is a view in the markets that more spending is in the pipeline, after all, Mr Biden will want to start his presidency on a positive note,” said David Madden, market analyst at CMC Markets UK.

The FTSE 100 index rose 0.4% and the domestically focussed FTSE 250 index added 1.4%.

The FTSE 100 has recorded consistent monthly gains since November after the sealing of a Brexit trade deal and hopes of a vaccine-led economic recovery, but has recently lost steam as tighter business restrictions sparked fears of a slow rebound.

Burberry rose 3.9% as it stuck to its full-year goals and said higher full-price sales would boost annual margins and Asian demand remained strong.

Global education group Pearson jumped 8.6% after its global online sales grew 18% in 2020, helped by strong enrolments in virtual schools.

WH Smith Plc surged 10.4% to the top of the FTSE 250 index as its trading during Christmas was ahead of its expectations.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V, William Maclean)

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