Full blown constitutional crisis may hit GBP

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 14June, 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.