Posted by on January 15, 2017 3:00 pm
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Categories: Bank of England brexit British FTSE100 China conservative party Donald Trump’s administration Economy European Court of Justice European Union Euroscepticism in the United Kingdom Fail flash Government of the United Kingdom House of Commons House of Lords Labour Party Newspaper Philip Hammond Politics Politics of the United Kingdom Theresa May U.S. UK renegotiation of EU membership United Kingdom European Union membership referendum United Kingdom invocation of Article 50 Volatility Withdrawal from the European Union

While the track record of the Sunday Times over the past 24 hours is somewhat spotty, following a report that as his foreign trip abroad once officially president, Trump is planning a summit with Putin in Reykjavik, which in turn was promptly denied by Trump staffers who called the story “fantasy”, overnight the paper also reported that UK Prime Minister Theresa May will announce that Britain is “seeking a clean and hard Brexit” in a speech this week that will promise to create a “strong new partnership” with the European Union.

The paper further notes that in the speech, scheduled for Tuesday, the PM will “finally lay her cards on the table”, making clear that the UK is set to pull out of the single market and the European customs union in return for the ability to curb immigration, strike commercial deals with other countries, and escape the jurisdiction of the European Court of Justice, the Sunday Times said without saying how it obtained the information. 

In a separate interview with German newspaper Welt am Sonntag, May’s finance chief, Philip Hammond, said Britain would be willing to abandon “mainstream economic and social thinking” if it is unable to craft a favorable post-Brexit EU deal. Hammond said he hoped the U.K. could remain in the mainstream, but was prepared for the consequences for a hard Brexit.

“If we have no access to the European market, if we are closed off, if Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage at least in the short-term. In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness. And you can be sure we will do whatever we have to do.”

To avoid fallout from the breakup and grant businesses some certainty over the outlook, May will seek a transitional phase between splitting from the EU and the beginning of a new trading relationship, the Sunday Times said, citing Brexit Secretary David Davis. “We don’t want the EU to fail, we want it to prosper politically and economically, and we need to persuade our allies that a strong new partnership with the U.K. will help the EU to do that,’’ Davis wrote in the newspaper. “If it proves necessary, we have said we will consider time for implementation of new arrangements.’’

The market is likely to have an adverse reaction to the leaked (if unconfirmed speech): as Bloomberg points out, “May’s blueprint for Brexit risks alarming investors, bankers and company executives who will fret that May is prioritizing social issues over economic growth.” A Downing Street source said that May had “gone for the full works”, although the prime minister’s staff admitted her words were likely to cause a “market correction” that could lead to a fresh fall in the pound.

Of course, that may be inaccurate, because as the recent record streak of 14-winning days in the British FTSE100 index to daily record highs has shown, the one thing that UK stocks like more than anything, is a crashing currency and the uncertainty that comes from a “hard Brexit.”

Perhaps this time will be different.

The PM’s office refused to comment on the report when contacted by Bloomberg, while in separate statement it said that May will declare in her speech that having divided over Brexit, voters are now uniting behind making it a success. “The overwhelming majority of people – however they voted – say we need to get on and make Brexit happen,” May will say. “So the country is coming together.”

Separately, Bank of England Governor Mark Carney, who has come under fire in
recent months for being too involved in the Brexit debate, is also due
to deliver a speech on Monday evening in London although the has declined to
comment on what he will discuss. More from Bloomberg:

Speaking on the BBC’s “Andrew Marr Show” on Sunday, U.K. opposition Labour Party leader Jeremy Corbyn said May “appears to be heading us in the direction of a sort of bargain-basement economy on the shores of Europe.” “We will lose access to half of our export markets — it seems to me an extremely risk strategy,” he said.

The Sunday Telegraph reported that the opposition Labour Party will introduce an amendment in the House of Commons demanding that members get to vote on a final Brexit deal, and if defeated they will speak out in the House of Lords to urge the government to make the guarantee of a vote.

In many ways May is motivated to finally engage the Article 50 process, as staying in the customs union would prevent the U.K. from lining up free-trade pacts with non-EU countries such as the U.S. and China. Foreign Secretary Boris Johnson returned from a trip to the U.S. last week saying he’d been told President-elect Donald Trump’s administration will want a fast trade pact with Britain.

Meanwhile, European leaders including Angela Merkel have held steadfast to the line that they won’t allow May to “cherry pick’’ the best parts of membership without accepting the responsibilities, including allowing free movement of labor. That requirement has become a pressure point in the U.K. with net migration to the U.K. from the EU reaching 189,000 in the year ended June. May has repeatedly indicated she views June’s referendum as a call from voters to slash that number.

As Bloomberg concludes, “Tuesday’s speech is likely to be closely watched by the financial markets, with currency traders increasingly seeing May’s pronouncements on Brexit as a trigger to sell the pound. Sterling fell following her speech at the Conservative Party conference in October, which fanned speculation she was eyeing a clean break with the EU, and dropped again following her first television interview of 2017.”

It remains to be seen if May’s hard line speech will lead to a spike in sterling volatility, which coming in an illiquid session due to the US MLK holiday on Monday, may result in yet another flash crash in the British currency, and if it will also lead to another all time high in the FTSE100 index.

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