When was the last time the English, the Scots, the
Welsh and the Irish (Northern) agree on the same thing? Teresa May has quite a big task to make sure
the four legs of the table are standing before Britain bargains the Brexit
terms with the Eurozone. Scotland’s
first minister, Nicola Sturgeon, is making Brexit more interesting by mentioning
the possibility of the second vote for Scotland Independency on the table. One tangible impact is the weakness of the
British Pound, it touched 1.106 against the EUR on 14 October. On 14 June, it was EUR 1.258 for GBP 1. Against
the US Dollar, GBP hit 1.218 on 17 October.
On 17 June, it was USD 1.430 for GBP 1.
Great for tourism, education and perhaps investment. FTSE 100 has been strong since the buggy jump
from Brexit. FTSE100 was as low as
5982.2 on 27 June and it is at 7020.47 as of 21 October. FTSE100 was also above 7000 level in April
2015 and at that time, GBP was around 1.36-1.4 to EUR. Let’s look at a scenario. If GBP and EUR becomes parity, so GBP weakens
another 10% against the Euro and GBP 1 is EUR 1. Never say never. Analysts at HSBC and UBS are making such
forecast. UK has been running deficit in
both fiscal and current account balances since the financial crisis in
2008. It is like the country is swiping
credit cards and spending more than it makes for 7 years. You can afford that if you happen to have the
money printing machine as well. One of
the potential outcomes is that people stop believing in the money coming out
from the printing machine, the British Pounds.
Companies and countries that sell goods and services to the UK may
prefer to have the sale in EUR or USD prices.
Even if they receive GBP from UK clients, they would convert GBP to EUR
or USD. This makes the GBP goes lower
against the EUR or USD. The Bank of
England might need to increase interest rate to encourage people to hold on the
GBP in their bank account. This sounds
extreme but it is textbook logic. If
Britain becomes 4 individual nations all want their own deal with Euro zone,
which could trigger the market to panic.
The Eurozone definitely does not like Brexit but they do not want to see
a broken Britain neither. The headline
news of “GBP 18 billion divorce bill for Brexit” scared many British tax payers
and probably gave Nicola Sturgeon a stronger voice when he meets Teresa
May. Meanwhile, foreigners are enjoying
the cheap Sterling and shopping luxury items in London. For investors with GBP income, the key words
for investment are diversification and protection.
While the GBP move could trigger market panic,
another black swan is swimming away. Hillary
is increasing her lead against Donald Trump in the US presidential race. On the surface, Donald Trump would be less
predictable than Hillary in terms of impact to the global political scene and
economy. Hillary has been a full time
politician for decades. Back in 1977,
President Jimmy Carter appointed Hillary to the board of directors of the Legal
Services Corporation and she was the first woman to be chairman of the board of
directors of the Legal Services Corporation in 1978. President Obama appointed
her as Secretary of State in 2008. In
short, she has been in the circle for 40 years and politicians are familiar
with her style and approach. She is also
very aware of the dos and don’ts in the White House. Well, she may not be a technical person when
it comes to emails. Hillary winning the
race against Donald could be a voter choice for stability. It makes the market easier to read. It also means the FED in US could continue
its path to increase interest rate without listening to Donald. Investors are already getting used no
Quantitative Easing in US and preparing for rate hike in US. A higher US interest rate could contribute to
a stronger USD against GBP. This is
another straw on the camel back for GBP.
So far, the weakness in GBP is one reason of
FTSE100 rally. Glancing over some UK
stocks, one may have a rosy picture over the UK economy. Tesco closed 214.85 GBp on 19 October, a new
high in 2016. London Stock Exchange
printed a 2016 high at 2922 GBp on 4 October.
BHP Billion had a peak at 1267 GBp on 10 October. Of course, there are lesser performers to
balance things out. The banking sector
is definitely not winning from Brexit.
Take Barclays as an example, it closed 183.2 GBp on 21 October, a fair
amount below 214 GBp level at the beginning of 2016 but already a lot better
than the 127.2 GBp low on 27 June.
