Brexit Begins

On Wednesday, Prime Minister, Theresa May signed a letter which invokes Article 50, the divorce papers between the UK and the European Union (EU). A two-year period of official Brexit negotiations with the EU will now begin.

In respect of the referendum, the UK government has set out certain key objectives. The key elements of which are control over UK law making and control over immigration flowing from the EU to the UK. Reconciling these desired outcomes with freedom to trade across the EU without barriers or penalties is likely to be a complex process. In the end both parties have something to lose if diplomacy fails to deliver a negotiated settlement.


  • The EU is the largest recipient of UK goods (45%). By the same token 51% of goods and services that the UK imports arrive from the EU.
  • The total number of immigrants per year, to the end of September 2016 was 525,000 of which 51% came from EU Countries (Migration Watch UK, 2017).
  • In 2015, the UK paid £18.2 billion to the EU budget. However, the country received close to £7 billion in rebates — paying more and receiving less (European Commission, 2017).

These 12 Countries Paid into the EU Budget More Than They Got Back in 2015

Source: European Commission

Some Scenarios?

  1. The UK takes back full control of labour flows and law making, while also making a new and favourable free-trade agreement with the EU. In exchange the UK agrees to continue to make contributions to the EU budget
  2. Stop paying any fees and risk heading towards a ‘hard Brexit’ scenario. This is Theresa May’s, “no deal is better than a bad deal”.
  3. The UK to move from a duty free trade environment to one where World Trade Organization tariffs apply. The UK subsequently negotiates bilateral trade agreements with each EU country.

Markets reacted calmly following the formal notification to trigger Article 50. Since the referendum last summer, sterling has fallen approximately 15%. This has been especially beneficial to UK investors invested into overseas assets like international equities and bonds. It has also enhanced UK equity returns (FTSE 100 rising by 15%), with investors realising that for those companies with large overseas operations a windfall occurs when foreign dominated currency earnings are translated back into sterling profits.

The EU referendum result had an immediate impact on bond yields, with 10 Year gilt yields falling sharply and bottoming out at 0.5% after some investors downgraded their assessment of the UK’s creditworthiness, ahead of the negotiations with the EU. Following the fall in sterling and higher oil prices investors anticipated a rise in inflation. This knocks-onto investors, who are more inclined to sell bonds causing prices to fall and yields to rise.

This is a historic moment for both the UK and EU. The direction of travel is now clear but the destination is as yet still to be agreed.

UK Markets (Since referendum to Article 50 trigger)

Source: Bloomberg, 2017

Trump Fails to Repeal Obamacare

Last week, it was announced that Donald Trump’s first major legislative effort involving a bill which would repeal the 2010 Affordable Care Act, also known as Obamacare, failed to be approved. The bill went to a vote in Congress and fell short of the 216 votes it needed. Trump blamed the Democrats despite his party, the Republican’s, controlling the House.

What Did the Bill Entail?

  • Repeal of Obamacare subsidies to help people pay medical bills
  • Provides low value tax credits
  • Cuts to the Medicaid programme for low earners
  • End penalties on those who do not buy health insurance
  • Allows insurers to raise premiums for older people

Following the announcement of Trump’s defeat the US dollar fell 0.4% with developed stock markets also marginally falling but recovered to positive territory by the end of business on Tuesday. The price of gold improved slightly rising by 0.9%. The precious metal is now at $1,259 an ounce. Year-to-date gold has increased in value by 8.9% in US dollars, which in some ways is quite sanguine given the backdrop of persistent and under estimated political change that has taken place over the same period.

Expressions of doubt over Trump’s ability to implement his full economic agenda have undoubtedly increased, but US consumer confidence (Conference Board Index) remains high. Strong consumer spending feeds into US GDP, revised up on Thursday to 2.1% for Q4.

The one certainty is a ramping up in political activity and rhetoric to galvanise the growth agenda that Trump seeks to attain with his Presidency.

US Consumer Confidence Index

Source: Bloomberg, 2017


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