Brexit is back and this time it looks for real. The UK government’s decision to trigger Article 50 imminently means the start of official negotiations with the European Union on the exit plan. But while financial markets remain cautious, the tension seems to be less as compared to the 23 June referendum vote.
There are a number of reasons for this. While sterling continues to trade at historically low levels, a plunge that was precipitated by the UK’s vote to leave the EU on 23 June, markets have generally priced in the idea of Brexit ever since Prime Minister Theresa May laid out a plan of action in January.
This week financial markets are extremely distracted by a number of other key events and, if pundits are to be believed, it’ll be the Federal Reserve rate decision on Thursday that investors will be watching most closely.
The week will also see Dutch parliamentary elections and a Bank of England rate decision. While all these events add uncertainty to markets, investors will certainly keep a close eye on the Fed and Brexit.
The discussions around Brexit divorce proceedings have a sense of déjà vu around them as we restart analysis on what this could mean for Britain. In the days after the UK voted to leave the EU, one of the biggest concerns was London losing its status as Europe’s banking hub. And while there has been a lot of speculation about banks moving out of London, little has happened yet.
European banks have had a tough few years after being hit by a number of factors – very low interest rates that have been squeezing out their profitability, uncertainty surrounding Brexit meaning they have had to be cautious of long-term trades, and massive fines that have had an impact on their earnings as well as share price performance. But banks’ fortunes are slowly starting to look up again and one of the reasons for that is the return of yield.
During the latest European Central Bank press conference, president Mario Draghi hinted at tightening monetary policy and also mentioned that the urgency for action is waning. Add to that the rising expectation that the Fed will hike rates and analysts expect that the rise in interest rates will slowly start to bring back confidence in financial institutions and the global economy.
Economists have warned that Brexit could be a long and arduous process and, even though the triggering of Article 50 means the start of the negotiations, a number of elections in key member states across Europe this year could delay the process.
On top of this, Britain has problems of its own to deal with. Scotland and Northern Ireland voted to remain in the EU, with access to the Single Market being a big factor for them. But with Britain losing its Single Market status and looking to sign free trade agreements with individual countries instead, Scotland and Northern Ireland are not pleased. Scotland’s first minister Nicola Sturgeon has called for a second referendum vote in late 2018 due to Brexit.
The triggering of Article 50 is literally just the start of a long and painful divorce process. And even though negotiations haven’t begun yet, some European officials are still hopeful of Britain coming back into the EU. Last week, European Commission president Jean-Claude Juncker said the UK will rejoin the EU one day. So why the break-up then?