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Brexit Briefing: UK Asset Price Volatility Set to Rise

Brexit Briefing: UK Asset Price Volatility Set to Rise

2017-02-16 12:54:00
Martin Essex, MSTA, Analyst
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Talking Points

- With the UK Parliament in recess until February 20, there has been little political news to buffet the Pound, UK government bond yields or London stocks.

- However, as the Brexit Bill moves to the House of Lords, volatility is likely to increase.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for the week on the DailyFX Webinar Calendar.

Next Monday, the unelected House of Lords – the UK Parliament’s Upper House – will begin scrutinizing the Bill allowing the Government to trigger Article 50 of the Lisbon Treaty and begin the formal negotiations on the terms for the UK to leave the European Union.

That means next week, and the weeks beyond, could see an increase in the volatility of UK asset prices, which have been remarkably stable recently. GBPUSD has traded between a high of 1.2775 and a low of 1.1986 since early October, mainly staying close to the 1.25 level. EURGBP has stayed near to 0.85 in the last few days. The FTSE 100 index of the major London-listed stocks has been climbing but has yet to top the all-time high reached a month ago, and the yield on the benchmark 10-year UK government bond has traded between 1.211% and 1.530% for the past two months.

Chart: GBPUSD Daily Timeframe (December 2016 – February 2017)

Brexit Briefing: UK Asset Price Volatility Set to Rise

Source: IG

However, the Brexit Bill’s remaining stages look set to be turbulent, and that could mean an increase in volatility both ahead of and after an EU Summit in Brussels on March 9/10 and the UK Government’s self-imposed deadline of March 31for the triggering of Article 50.

For a start, there are by-elections for two seats in the House of Commons on February 23, when the pro-Leave UK Independence Party will take on the pro-Remain Labour Party, which currently holds both of them. The breakup of the UK remains a possibility too, albeit a distant one, with the Scottish National Party still smarting from the decision to leave, which the Scottish people voted against. And one recent news story even suggested further fragmentation, with the Shetland islands toying with the idea of breaking away from Scotland.

In addition, a row has broken out between the Press and the Judiciary, with Lord Neuberger, the head of the UK’s Supreme Court, accusing politicians of not doing enough to protect the independence of the judicial system when judges came in for harsh criticism from pro-Brexit newspapers last year. On the other hand, the chief financial officer of Capgemini, the French IT consultancy, was quoted as saying that it sees no major impact from Brexit.

Still, the Brexit negotiations are certain to be tough, particularly as upcoming national elections in the Netherlands, France and Germany are likely to force their respective Governments to take a hard line. In particular, the EURGBP cross could be buffeted by arguments over what the UK will have to pay to leave. So far, attention has centered on the price but the Brussels-based economic think tank Bruegel suggested recently that while estimates so far have focused largely on the costs and liabilities that the UK will have to buy its way out of, the UK will surely get a share of the EU’s assets, which could total €153.7 billion.

The tortuous negotiations therefore look likely to increase the volatility of UK assets, and also of the Euro, European stocks and EU government bonds – particularly if the polls show rising anti-EU sentiment ahead of the upcoming elections on the Continent.

Markets

Index / Exchange Rate

Change (Exchange Hours/GMT Session Rollover)

Market Close/Last

FTSE 100

-0.50%

7,266

DAX

-0.26%

11,764

GBP/USD

+0.31%

1.2495

EUR/USD

+0.36%

1.0637

EUR/GBP

+0.12%

0.8513

Upcoming UK/EU Event Risk

Events

Date, Time (GMT)

Forecast

Previous

G20 Foreign Ministers’ Meeting

Feb 17

Euro-Zone Current Account s.a. (Euros) (Dec)

Feb 17, 0900

36.1b

Euro-Zone Current Account n.s.a. (Euros) (Dec)

Feb 17, 0900

40.5b

UK Retail Sales (MoM) (Jan)

Feb 17, 0930

0.7%

-2.0%

UK Retail Sales (YoY) (Jan)

Feb 17, 0930

3.9%

4.9%

UK Retail Sales Inc. Auto Fuel (MoM) (Jan)

Feb 17, 0930

1.0%

-1.9%

UK Retail Sales Inc. Auto Fuel (YoY) (Jan)

Feb 17, 0930

3.4%

4.3%

Euro-Zone Construction Output s.a. (MoM) (Dec)

Feb 17, 1000

0.4%

Euro-Zone Construction Output w.d.a. (YoY) (Dec)

Feb 17, 1000

0.0%

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

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