- Futility Brexit is growing with the likelihood of approaching March 2019 in the UK.
- No deal would be extremely damaging to the financial markets.
- Most likely, this will lead to a sharp drop in the British pound, an increase in British stocks and will force the Bank of England to take drastic measures.
As Brexit's day comes closer, the prospect of Britain, leaving the European Union without a deal, continues to grow. What began as an almost unimaginable scenario, in the minds of the British public at least, the most probable result of Brexit.
Earlier, this week, the government issued a series of articles detailing what can happen in the absence of a deal. They ranged from lack of drugs to increase credit card chargesto lack of sperm, What the government did not discuss is what can happen in the financial markets, if such a situation should be played out.
Fortunately, the research house Pantheon Macroeconomics modeled what can not mean for the key British market assets after it happens in March next year. Although this would not be as seismic shock as initial voting for secession from the European Union in June 2016, the markets will see large movements in currencies, stocks and bonds.
More pain per pound
First, the British pound will inevitably suffer. After the referendum, the pound's movements were almost completely linked to the developments of Brexit. Any news that says that Britain is moving to a softer Brexit, and it rises; any news about the opposite, and it falls.
This ratio is reflected in the recent decline in the pound to less than 1.28 against the dollar, which coincided with an increase in the probability of the absence of a deal. If the deal does not materialize, Samuel Tombs, the chief British economist of the Pantheon, says the pound will fall more than 10% from current levels in the near future, falling to a level of $ 1.15 by the end of March.
Other analysts tend to agree with the forecast of the tombs, Back in July, Neil Jones, head of sales at hedge funds at Mizuho Bank, told Bloomberg that if there is no Brexit deal, the pound will fall sharply and "hit new lows after a referendum."
Commerzbank strategist Thu Lan Nguyen reflected this opinion, saying that she "Foresees at least a reaction to what we saw after the referendum." The day after the referendum, the pound fell more than 8%.
Growing stock market
While the pound falls, FTSE 100 – which has a feedback to the currency – is likely to reach record highs.
weak pound tends to mean a strong British stock market. This is because it is highly distorted in relation to companies that do not actually make their money in the UK. For example, the FTSE 100 contains miners, oil companies and pharmaceutical giants, with about two-thirds of all revenues for companies in the index obtained from abroad. This helped the index after a record high after the vote,
Pantheon's prediction is that the FTSE 100 breaks above 8,000 in the absence of a Brexit deal, which is 5.5% higher than Friday's closing price.
Decrease in yield of bonds
Turning to the UK bond market, the Pantheon predicts that the yield on 2-year gold will drop to 0%. It may seem contradictory that yields will fall, given that lower returns tend to reflect investors who perceive the bond as safer – something unlikely in the absence of a Brexit deal.
The argument of the Pantheon, however, is that without the conclusion of a transaction, Brexit will force the Bank of England to immediately reverse the normalization of monetary policy, started last year.
The bank raised interest rates twice since November 2017, reaching 0.75%, but it will need to reduce rates to 0%, and also launch 100 billion pounds sterling (129 billion USD) of a new quantitative easing, which, in its turn, would suppress gilded harvests, according to the tombs. This reduction will be the first time that the bank rate in the UK has dropped to 0%.
If these scenarios seem extreme, the tombs and his colleagues have some encouraging news, they put the point of view on the outcome without bargains by only 10%, citing their belief that Prime Minister Theresa May capitulates to the EU's demands that will eventually lead to the softest possible Brexit.