Anxious over Brexit exploration

The economy of the UK can drop by 3% by 2020, the GDP of the EU will decrease by 1%

The UK has always been treated by the EU on the exclusive terms, but, probably, it has not been enough for the conservative electorate. Migrants and the chaos in Calais have been the last straw. Brexit has become a blow to the confidence of the big money holders against the uncertainty concerning the European Union. Large business, the City of London and the university cities have been defeated by rural and industrial Britain.

The ordinary British people could make the decision on an exit due to mistakes and too tough regulation of the EU institutions responsible for work with national parliaments and the governments of the Member States. Now the Scottish National Party calls for a new independence referendum, the Northern Ireland alleges that as a result of vote it prepares for independent actions as the British government fails to represent its interests.

The decision of the UK can instigate similar steps from the other members of the block and give the new opportunities to such populist politicians as Trump in the USA, Geert Wilders (the leader of the Party for Freedom) in the Netherlands and Marine Le Pen in France.

The federation of the German industry representing the largest corporations in Germany has already stated that Brexit will hit the German economy hard. Considerable recession of business co-operation with England by 30-50% is expected to happen in the next months. It is appropriate to remind that there are nearly 400 thousand people who work in the British branches of the German companies.

Process of the UK’s leaving the EU will cause the outflow of the labour force from the UK’s labour market and create an array of problems for the economic growth in the long term. JPMorgan Chase & Co. and HSBC Holdings Plc have already warned that Brexit will force them to remove thousands of workplaces from London.

Following the OECD analysts review, the economy of the UK can drop by 3% by 2020, the GDP of the EU will decrease by 1%. Reduction of capital inflow, pound sterling rate fall and the increase in a premium for risk, complexity of the trade relations will become the main problems for the UK.

Financial losses of Britain which may arise out of the exit are estimated at $42 billion within 2 years. Top managers and large investors, first of all, are interested in the following:

  • the agreement regulating the goods turnover with the EU in amount of $575 billion a year;
  • terms on an access of the British companies to the single market of the European Union ($13,6 trillion);
  • whether the banks registered in the UK will still be able to do the business in the EU countries.

Having lost the privilege of banks of the EU to do the business in any other country of the block, the credit institutions which are based in the UK will probably be forced to transfer the essential part of the transactions to Frankfurt, Dublin, Paris and the other centers.

Having regard to the importance of the financial sector for the British economy, another question arises in relation to trading and clearing in euro: the EU is not ready to provide the boundless access to these transactions to those who do not fall within its regulation. The right of the asset managers to sell share funds throughout the continent can also be reviewed.

It is obvious, that the market has experienced turmoil. The pound drop to a 30-year minimum has constituted more than 12% to dollar, the subsequent kickback has reduced fall to 7,6%. Before the referendum results appeared, the "smart money" betted on fall of pound and oil, for example, Morgan Stanley as early as on Thursday morning recommended to VIP clients to sell pound with for 1.35 USD.

The FTSE 100 stock index has fallen by 5%. All risk assets including oil quotations (more than 5%) have collapsed. Sharp fall has been shown also by the Asian securities. The cumulative bank index has dropped by 6,7% by the opening of the exchange in London including Deutsche Bank AG (-18%), Credit Suisse Group AG (-14%) and Barclays Plc. The bonds of the Royal Bank of Scotland Group Plc and the Bank of Ireland became leaders of the decrease.

There is a turmoil over buying the German bonds and similar bulk selling of the Spanish and Italian papers. ShNB has carried out the official currency intervention, BOJ has carried out yen intervention without official declaration.

The Bank of England has expressed the readiness to provide the British banks with additional 250 billion pounds (nearly $350 billion), and also undertake a number of additional measures. In the light of new circumstances the highest rating of the Britain is considered by Moody's Investors Service and S&P, softly, speaking, unreasonable.

The Federal Reserve has confirmed that it is able to provide the US dollar liquidity through the existing swap lines with the Central Banks to facilitate pressure upon the global markets which can have negative consequences for the economy of the USA. Obviously, the issue of the interest rate increase in July is practically not discussed.

Cameron's statement for the resignation seems to be logical. The UK should get a new management, the formal negotiations with the EU will be conducted by a new Prime Minister. With the greatest probability Cameron's successor will be from the camp of the Brexit supporters, for example, the former Mayor of London Boris Johnson or the Minister of Justice Michael Gove.

Current week Cameron will report a situation to the EU leaders. It is already announced that the UK will be able to redistribute the sums payable to the budget of the EU now, but Brussels shall understand what relations with the block the UK is ready to maintain. Even according to procedure of the EU, the UK will face 2 years of the difficult negotiations on review of the relations with the EU, but hardly this period of time will be enough for exploring complex trade agreements. It is t likely that negotiations will last long time after an official exit. The main issue now is on what terms the UK will leave the European Union.

Anyway, Britain will remain the part of Europe and at the moment it is possible to offer the following options of further cooperation:

  1. Russia model: cooperation only within the Council of Europe. Zero option - no rights and opportunities for business.
  2. Turkey model: the relations only at the level of the European customs union will not meet the expectations of the medium and small business.
  3. Switzerland model: EFTA+ Schengen area. It is less likely as even within the EU Britain strictly adhered to the visa system.
  4. Switzerland without Schengen model: business, and a politicum, and individuals will not be satisfied as a result of the need for the receipt of additional visas will hardly arrange both.
  5. Norway model: the country will not be considered as the member of the EU, but enters EEA (The European economic zone: free capital flow, goods and citizens) and in EFTA (European Free Trade Association the admission to the single market and the equal rights with EU countries). It is the most probable decision with a number of restrictions (for example, the rights to work and Schengen).

Brexit as the expression of the people’s will, is not legally binding, but the authorities are unlikely to ignore it. Nevertheless, the British people have been actively signing the petition about a repeated referendum under the EU laws (an appearance of at least 75% and at least 60% for one option).By the time this report is made more than 3.5 million signatures have been collected. Anyway the decision triggering the exit from the European Union will be made by the Parliament. Hot debate is unavoidable, especially having regard to that over 70% of MP’s backed UK’s remaining in the EU.

Under Article 50 of the TFEU in order to start the exit procedure London shall notify officially the EU leaders in Brussels. However, the consultations upon Brexit have already begun. On Friday morning in the meeting of an administrative management of the EU has taken place Brussels. On the same day the meeting of the Ministers of Foreign Affairs of the EU Member States has been held in Luxembourg. On Saturday six founder countries of the union have held a meeting in Berlin, including Ministers of Finance.

Technically the loss from Brexit has been gradually recouping in many directions. Further, if the conditions of Brexit are too tough for Britain or higher political instability in the region will be shown, then the markets will be expecting the continuation of a collapse.

The British issue will be actual for at least 2-3 weeks. Volatility has decreased, but remains too high. It is dangerous to do some forecasts at present, the main couples will be fixed at the new levels, periodically beating out speculators from both sides.

EUR/USD: Key support 1.1015, range of resistance (1.1143-1.1209), zone of support (1.0973-1.0845). Prospects remain the same - trade higher than the level 1.1200 is dangerous by fast movement to 1.2000-1.2200.

GBP/USD: Key support - 1.3369. Strong intraday resistance: (1.3440-1.3482) / (1.3643-1.3735). medium-term protection (1.3293-1.3176), breakdown is still improbable up. The negative base can cause fall to 1.2200-1.2000-1.1500.

作者: Alexander Ward,
ForexChief Currency strategist