Morning Brief – 8th time lucky…

8th time lucky…

As the eighth formal round of talks between the European Union and the United Kingdom get underway in London today Sterling traders are facing the reality of a no-deal conclusion to the transition period in only a few months’ time. Despite the relentless Brexplainers published, this critical moment for the United Kingdom and globalisation alike deserves further examination. We find a far more sanguine conclusion to the status of talks than many. Brexit negotiations are stuck between a fish and a state aid as the old classic saying goes. In fact, they also say a picture is worth a thousand words. Of the many photos and images that might be out there to sum up the status of Brexit negotiations, this one isn’t bad.

Billingsgate market, East London’s wholesale fish market has existed in some form since the 16th century. It provides an arena for buyers and sellers of fish from around the UK to come together and form a market. Today it stands at the foot of some leviathans of industry, at the heel of London’s outer-city financial hub, Canary Wharf. At the moment, Brexit negotiations are placing the two in one basket as the two remaining hurdles to a Brexit deal. Financial services amongst other present and future UK industries boasting international comparative advantage, are the potential recipients of state aid and commercial subsidy. Just as the physical buildings themselves do, the obstacle of state aid to achieving a Brexit deal towers over access to UK fishing waters. The conclusion? The UK has a bargaining chip to spend to achieve its own concession on areas it cares most about, namely, state aid. Perhaps we ought to rename it Brexitgate Market…

Negotiation theory 101 stresses the importance of credibility in negotiations. If the other side believes at any point you need them more than they need you it’s game over and time to fold your hand. Announcements this week that Johnson is planning to overwrite legislation governing the UK’s withdrawal from the European Union is providing just the credibility the UK negotiating team needs in order to force concessions from their European counterparts. The specific decision to draft legislation redefining the UK’s rights with respect to state aid in Northern Ireland will hit the EU where it hurts and simultaneously prepare the UK for the possibility that we really do leave without a deal.

If Mr Johnson and his government lead Parliament to legislate on top of the international agreement thereby stripping away the UK’s shackles on state aid, UK negotiators will have their hands tied in negotiations. No longer will they be able to make concessions in the area the EU has a vested interested in bringing under control and could not concede in the name of a deal even if they wanted to. The idea is therefore to produce results fast and approve any prospective deal in Parliament ahead of changes to the withdrawal agreement. The date? 15th October, ahead of the EU summit, we are told by the Prime Minister.

The Pound fell heavily during yesterday’s session, pricing in the probability of a no-deal exit and concomitant rise in uncertainty. The move in options markets was a rise in implied volatility as markets brace for a series of significant headlines that will seal the fate of the UK’s trade with the Union over the medium term. I hope Mr Barnier’s Eurostar was not delayed this morning, the clock’s ticking and calendar’s flicking!

Discussion and Analysis by Humphrey Percy, Chairman and Founder

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