Financial Event: Brexit

What is Brexit?

Brexit, a shortening of the phrase ‘British Exit’, is a word used to describe both the political movement and the resulting referendum, when the people of the United Kingdom voted to leave the European Union by the 29th of March 2019. The ‘Leave’ or ‘Stay’ referendum was held on Thursday 23rd of June 2016 with ‘Leave’ winning by 51.9% to 48.1% of ‘Stay’. Turnout was 71.8%, meaning more than 30 million people had voted.

The United Kingdom has been a member of the European Union since 1973 and this ‘divorce’, as it is frequently described, gives rise to a variety of political and economic issues for both sides. Provisionally, the UK and the EU have the following main issues:

  • The United Kingdom’s monetary debt to the European Union
  • Status of UK citizens living in other EU member states
  • Northern Ireland border dispute

Still undecided on the Northern Ireland physical border and on future relations with EU member states, both sides have agreed on a 21-month ‘tran- sition period’ to gain some needed time in order to prepare and establish the grounds for post-Brexit relations and to try to figure out a viable solu- tion to the border dispute.

This is also the first time that an EU member will be leaving the union, making Brexit not only one of the biggest economic and political events of modern British history, but also one of modern European History at large.

Why is Britain leaving the European Union?

Former Prime Minister, David Cameron, said there were too many restrictions from the EU on British lawmakers. ‘Leave’ supporters perceived and portrayed this as loss of UK sovereignty and EU domineering. European restrictions on Immigration laws and policies were also cited as a reason for wanting to leave the Union.

Additionally, the UK would be forced to abandon its currency, the British Pound, for the Euro by 2020. This was a major economic concern to the UK since historically the Pound has been and still is stronger than the Euro and the UK’s economic model is more stable than the multiple-econo- mies model that forms the common currency Eurozone.

What is the ‘Transition Period’?

The Transition Period has been agreed by both sides to begin after the 29th of March 2019 until the 31st of December 2020 to allow businesses and other institutions to prepare and adjust to the new post-Brexit rules between the UK and the EU. It will also provide more time for addressing many details on the new-forged relationship. Free movement, in accordance with EU request, will continue during this period. Also, while ‘transitioning’, the UK will be able to enter trade deals as a single entity only those deals will have to come into force no sooner than 1st of January 2021.

How will Brexit affect the Financial Markets?

Brexit could, potentially, have a profoundly devastating impact on Britain’s economy. According to Bloomberg, investment in British fintech firms had risen 53% to 660 million pounds ($974 million) in 2015 placing UK at the top over other EU members. These business- es have been benefiting through “passporting”, that is the relative ease of a company licensed in one EU member country to trade across European member countries without much restriction or constriction. It has been estimated that by leaving the EU the UK could stand to lose about $5 billion in investment over the next 5 years.

Various analysts, investors and business owners believe that Brexit could cause many existing companies to relocate outside the UK and into the EU in order to retain their “passporting” privileges and they expect this to cause major disruption to businesses and the financial industry. Having to renegotiate or reach new deals with the rest of the world post-Brexit, could also give rise to uncertainty and volatility in the financial markets.

Watch the following video for more details on Brexit:

Brexit Important Dates

Prime Minister Boris Johnson called on Thursday for a general election on Dec. 12 to break Britain's Brexit impasse, conceding for the first time he will not meet his "do or die" deadline to leave the European Union next week.

Following are the key dates between now and the Brexit day:

Leadership

The two prime ministerial candidates are Jeremy Hunt and Boris Johnson.

160,000 Conservative Party members will select the winner by postal ballot.

  • 22 July 2019 - Voting closes at 1600 GMT.
  • 23 July 2019 - The new leader will be announced.
    • No further details were provided regarding the announcement, but a fundraising email from the Conservative Party to members suggested it would be around 1000 GMT in London.
  • 24 July 2019 – Theresa May will hand over power to her successor.
    • Theresa May is due to depart from her Downing Street office and travel to parliament - after 1000 GMT.
    • She will host her final question and answer session in parliament - 1100 GMT
    • Theresa May will travel to the Buckingham Palace to see Queen Elizabeth and formally stand down. She is not expected to return to Downing Street afterwards - 1200 GMT
    • After Theresa May leaves, the new prime minister will travel to visit the Queen and he will be asked to form a government. Then, he is expected to travel to Downing Street.
    • Details for that day, have not been yet announced, but they could include a speech in Downing Street and the naming of some senior cabinet positions.

Parliament

It’s quite possible that the new prime minister will be facing an immediate test of their governing abilities. The opposition Labour Party could push for a motion of no confidence. The prime minister would then need to win a vote in parliament, to survive.

There are 14 days in which it can try to win another vote or an election is triggered, if a government loses a vote of confidence.

  • 25 July 2019 - Summer Recess, the Parliament is due to break up. In the case of a no confidence vote were to be held before lawmakers leave for their summer break, it would have to take place on this day.
  • 3 September 2019 - Parliament will resume for a short session. This session typically lasts around two weeks before there is another break while the political parties hold their annual conferences. The exact length of this session has not been yet announced.
  • 21-25 September 2019 - The opposition Labour Party holds its annual conference.
  • 29 September to 2 October 2019 - The Conservative Party holds its annual conference.
  • Early/Mid - October 2019 - Parliament resumes following the party conferences. The exact dates for this session have not been yet announced.

Under the existing British law, any new Brexit deal would need approval by parliament before it can be ratified.

  • 31 October 2019 - Britain is due to leave the European Union.
  • Possible extension for 12 December 2019
  • 31 January 2020 - Brexit day.
  • 1 March 2020 – Post-Brexit transition period.
  • June 2020 – Britain & EU27 summit.
  • 26 November 2020 – Deal must be presented to European Parliament.
  • 31 December 2020 – Deal ratification deadline.
  • 31 December 2022 – Maximum possible extension of transition period.

MARKETS TO KEEP AN EYE ON

forex

FOREX

Bank of England announcements will continue to have a major impact as the Bank seeks to restore confidence, though traders won’t be fooled by forced smiles. Keep an eye on major pairs like EUR/GBP and GBP/USD, but remember that Donald Trump’s handling of the US economy may take centre stage as far as the dollar is concerned. 

metals

PRECIOUS METALS

As ever in times of uncertainty, all eyes turn to gold and other precious metals.

Gold fell to its lowest level in over ten months after the Federal Reserve announced a rate increase in December 2016, underscoring that Brexit plays second fiddle to US policy. But if the president can’t implement his agenda, Brexit could play a key part in driving a bull market for the yellow metal.

indices

INDICES

In the first quarter of 2018 both FTSE100 and the British pound have been volatile as a result of sell-offs on global equity markets and the intensifying pressure of Brexit. The trading relationship with Europe after the transition period will be critical to many firms’ future earnings, so indices are very likely to be affected by the terms of the final agreement.