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Sterling holds near $1.30 as optimism over Brexit deal grows

Sterling held near $1.30 on Tuesday as signs of progress in Brexit talks helped cement gains after investors pushed back expectations for when the Bank of England would cut interest rates below zero.

The pound was last down 0.1% at $1.2966 after topping $1.30 for the first time since mid-September. Sterling later fell into negative territory, before making up ground after Reuters reported that Britain and the European Union were moving “closer and closer to a deal”.

European Union diplomats told Reuters that Brussels was gearing up to negotiate until as late as mid-November — rather than cutting talks off at the start of next month — to avoid a damaging “no-deal” scenario when Britain’s standstill transition with the bloc ends on Dec. 31.

Sterling last traded down 0.1% against the single currency at 90.91 pence.

Cautious optimism that London and Brussels would reach a deal has been growing in recent days, and most analysts now expect the two sides to do so before the transition deadline.

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“We’re getting closer and closer — the talks are miraculously getting slightly warmer,” said Mark Holman, CEO at TwentyFour Asset Management.

“For us looking from financial markets, it does seem stupid not to get a deal done … If you ask me today, I think it’s probably 50:50.”

Earlier, sterling had touched $1.3007, its highest since Sept. 18.

NEGATIVE RATES

That mark came as money markets pushed back bets that Britain’s interest rates would turn negative, with investors now seeing rates falling below zero in May 2021. Previously they had expected the Bank of England to cut rates into negative territory in March.

The BoE, which cut borrowing costs to a record-low 0.1% in March, is looking at whether it is technically feasible to cut its main interest rate below zero, something that has already been done in Japan and the euro zone.

Bank of England rate-setter Jonathan Haskel said on Monday he saw downside risks to the economy — and also some possible benefits — from cutting interest rates below zero.

“They are still keeping the option open that negative rates could help support the recovery,” said Lee Hardman, currency strategist at MUFG.

Sub-zero rates would likely weaken the pound, at least in the short term, he added.

Reporting by Tom Wilson

Source: UK Reuters

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Getting Brexit done will not help UK economy, say academics

Carrying out Brexit will not improve the UK’s struggling economy but will usher in years more uncertainty about Britain’s trading relationships, a new report has said.

The hard Brexit that Prime Minister Boris Johnson is proposing will also limit the size of the UK market and raise trade costs, making it a less attractive place for investment, according to at the London School of Economics (LSE).

The report says the UK economy has suffered a “lost decade”. Productivity – output per hour worked – is 24 per cent below its pre-financial crisis trend and real wages are yet to return to 2008 levels.

A major factor has been low levels of investment, the report says, which was suppressed in part by austerity and more recently by Brexit uncertainty.

Johnson has said that leaving the European Union with a Brexit deal would boost the economy. Professional services firm KPMG said in September that a Brexit deal would mean “investment recovers some ground”.

However, John Van Reenen, professor of economics at LSE and an author of the report, said: “It is a mistake to believe that ‘getting Brexit done’ will improve things.

“First, there will be continued uncertainty due to years of negotiation over what form the UK’s future trading relationship with Europe will actually look like. Second, a hard Brexit is certainly bad for the economy compared with remaining in the EU.

“The UK will be a relatively smaller market with higher trade costs with our closest neighbours, so a less attractive place for investment.”

To address Britain’s “abysmal” performance on productivity and “pitiful” wage growth, more public and private investment is required, the LSE report said today.

All the major parties have promised to increase government spending in their manifestos ahead of the 12 December General Election, with Labour’s radical, but much-criticised, plans promising by far the most.

Van Reenen said: “It is welcome that the main parties are promising increases in spending to finance public investment, so long as such investments are based on solid evidence rather than political gimmicks and ministerial whims.”

By Harry Robertson

Source: City AM

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How much smaller UK economy is likely to be with Boris Johnson Brexit deal

THE UK economy would be 3.5 per cent smaller in the long term under Boris Johnson’s Brexit deal, compared with continuing European Union membership, a leading independent think-tank is warning.

The National Institute of Economic and Social Research says it would not expect UK economic activity to be boosted by approval of Mr Johnson’s deal, which involves leaving the single market.

In its latest forecast, published today, the think-tank says the UK outlook is “clouded by significant economic and political uncertainty and depends critically on the United Kingdom’s trading relationships after Brexit”.

The NIESR adds: “We would not expect economic activity to be boosted by the approval of the Government’s proposed Brexit deal. We estimate that, in the long run, the economy would be 3.5% smaller with the deal compared to continued EU membership.”

The think-tank forecasts, on the assumption that chronic uncertainty persists but the terms of EU trade remain unchanged, that growth will be less than 1.5% in 2019 and 2020, although it notes this prediction is “subject to significant uncertainty”.

It says risks to growth continue to be weighted to the downside, although not as much as in its previous forecast “given the reduced likelihood of a no-deal Brexit”.

The NIESR now judges there is a 15% probability of UK economic output falling in 2020, “also reflecting the risk of a more severe global slowdown”.

The think-tank noted the UK economy was estimated to be 2.5% smaller now than it would have been otherwise, as a result of the 2016 Brexit vote.

By Ian McConnell

Source: Herald Scotland

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UK’s new Brexit deal worse than continued uncertainty – NIESR

Prime Minister Boris Johnson’s Brexit deal would hurt Britain’s economy more than further delays and continued uncertainty about leaving the European Union, a think tank said on Wednesday.

Late on Tuesday, Johnson won parliament’s support for an election in early December that he hopes will break the Brexit deadlock and lead to the approval of the deal he clinched with Brussels earlier this month.

Johnson has said his deal is the only solution to the uncertainty that has weighed on the economy since the 2016 referendum.

By contrast, the opposition Labour Party wants to negotiate a new deal and put it to a second referendum, which could overturn 2016’s result.

Johnson’s Brexit plan opens the door to much looser economic ties between Britain and the EU.

The National Institute of Economic and Social Research (NIESR) said that the economic cost of a more distant relationship would outweigh the gains from ending Brexit uncertainty.

“We don’t expect there to be a ‘deal dividend’ at all,” NIESR economist Arno Hantzsche said. “A deal would reduce the risk of a disorderly Brexit outcome but eliminate the possibility of a closer economic relationship.”

Unlike his predecessor Theresa May’s deal, Johnson’s does not require England, Scotland and Wales to stay in a customs union with the EU in the future, making tariffs and other barriers likely after a transition period.

NIESR estimated that in 10 years’ time, Britain’s economy would be 3.5% smaller under Johnson’s plan than if it stayed in the EU – roughly equivalent to losing the economic output of Wales.

In a scenario of ongoing uncertainty similar to now – where Britain keeps the economic benefit of unrestricted access to EU markets but without any long-term guarantees – the economy would be 2% smaller, it forecast.

May’s deal would have limited the damage to 3.0%, while a no-deal Brexit would make the economy 5.6% smaller than if it stayed in the bloc, NIESR said.

Earlier this month another academic think tank, UK in a Changing Europe, estimated Johnson’s deal would make Britain more than 6% poorer per head.

In the nearer term, NIESR said the Bank of England should cut interest rates to 0.5% from 0.75% at a meeting next week, but said it did not expect the BoE to act until March, when Governor Mark Carney’s successor is due to be in place.

The BoE has been an outlier among major central banks in not loosening policy as the global economy slows.

NIESR said inflation was likely to undershoot the BoE’s target, especially if sterling rallied on the basis of a reduced risk of no-deal Brexit.

The think-tank forecast Britain’s economy would grow 1.4% this year and next, assuming no major short-term change to Britain’s relationship with the EU, down from 1.6% in 2018 and well below its long-run average.

By David Milliken

Source: Yahoo Finance UK

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Pound choppy as UK parliament in turmoil over Brexit deal

The pound against the US dollar (GBPUSD=X) was choppy in the first weekday trading session following an extraordinary session in UK parliament over the weekend that saw prime minister Boris Johnson’s Brexit plans in disarray.

Initially, investor sentiment remained dampened, with cable down by 0.6% and hovering around the $1.29 mark, as traders await to hear when a vote on Johnson’s Brexit deal, which was sealed with the European Union last week, will be held. However, it bounced back into positive territory around 920am UK time.

On Saturday, Members of Parliament (MP) backed a motion to further delay the process of Britain leaving the EU.

Dubbed Super Saturday, UK parliament held its first Saturday session in 37 years. Johnson tried to convince MPs to support his agreement he made with the EU and MPs debated the proposal. Johnson said in a speech “now is the time to get this thing done,” adding that delaying past the Brexit deadline of 31 October would be “corrosive.”

Johnson’s cabinet threatened to postpone a vote on a revised deal if politicians voted to drag out Britain’s exit from the 27-nation bloc, again. However, MPs voted 322 to 306 to back a motion designed to rule out a no-deal exit — which is what will happen if politicians do not agree to Johnson’s new deal with the EU. It was tabled by independent MP Sir Oliver Letwin, which “withholds approval” for Johnson’s Brexit deal until legislation implementing it has been passed.

Subsequently, Johnson was obliged to go to the EU and ask for an extension beyond the 31 October deadline — the second extension in under a year.

Johnson said at the time that he will press on “undaunted” with his Brexit strategy while the EU said it was up to the UK to “inform it of the next steps.” MPs signalled that a vote on Johnson’s revised Brexit agreement could now take place on today — however, this is up to the Speaker of the House of Commons.

However, Johnson caused greater ructions among parliament after he sent three letters to the EU:

  • An unsigned photocopy of the request for an extension as outlined by the Benn Act and in which he is obliged to give
  • Another note from the UK’s ambassador to the EU explaining why
  • A personal, signed letter from Johnson on why he doesn’t want a delay (which is inline with that he has repeatedly said since he became prime minister. He has even said, he would rather be “dead in a ditch” than delay Brexit).

Johnson is now under scrutiny from the law as judges are set to decide whether the unsigned letter sent by Johnson complied with the Benn Act or if the prime minister is in contempt of court. Meanwhile he said parliament must be given “a straight up-and-down vote” on the prime minister’s Brexit deal

“We cannot allow parliament’s letter to lead to parliament’s delay,” he said.

It is now up to Speaker of the House of Commons John Bercow to grant a vote on Johnson’s Brexit deal in parliament.

By Lianna Brinded

Source: Yahoo Finance UK

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How new Brexit deal could hit UK economy, wages and public spending

UK trade with Europe could plummet by 25% under the kind of EU free trade deal planned by Boris Johnson, according to the British government’s own figures.

New trade barriers could wipe 4.9% off long-term economic growth, leave real wages 6.4% lower and see borrowing soar by at least £72bn just to maintain spending than if Britain remained in the EU.

Analysis by Yahoo Finance UK of official forecasts released last year suggests the UK prime minister’s Brexit proposals could also leave the UK worse off than under his predecessor Theresa May’s plans.

The government is under pressure from backbench MPs to confirm the figures are a valid reflection of Johnson’s proposals, or to swiftly update them before parliament votes on Saturday.

The figures predict greater freedom in striking trade deals outside Europe, one of Johnson’s key objectives, will add just 0.1% to growth over the next 15 years.

It indicates the benefits of such trade deals are likely to be far outweighed by the damage from tougher terms of trade between Britain and Europe in years to come.

The sectors hit hardest by a Johnson-style free trade deal

The negative impact is envisaged across many sectors of the economy and every region of the UK, with the north-east expected to be hit hardest.

Manufacturing, particularly pharmaceutical and car exports, could be battered the hardest, with the sector’s ‘gross value added’ (GVA) predicted to be 8% lower than if current trade rules continued.

The agri-food industry and financial services could take a 7% hit to GVA, while the UK’s dominant services sector could contribute 5% less to national growth.

The economic harm largely reflects increased barriers to business between Britain and EU countries, such as increased paperwork, checks and costs to ensure goods or services meet EU or UK standards, customs rules.

A key difference with former prime minister Theresa May’s plans is the likelihood of new ‘rules of origin’ checks, forcing companies to prove where products and their parts have come from to avoid extra taxes.

“Higher trade barriers between countries would be expected to raise the cost of exports and imports and incentivise a focus on the domestic market,” officials noted.

But the report still said the economy would continue to grow in the long run under any Brexit scenario including a no-deal outcome.

Government under pressure to reveal latest Brexit analysis

The figures were included in the ‘EU Exit: long-term economic analysis’ briefing published under May’s government in November last year.

They estimate what the impact would be of a “hypothetical free trade agreement (FTA),” reflecting average FTA non-tariff costs such as being outside the EU customs union, regulatory barriers and other changes.

While May’s deal with Brussels pledged “as close as possible” trade terms with the EU on goods, Johnson pledged a looser “free trade agreement.”

A leading backbench MP wrote to the UK chancellor Sajid Javid on Friday urging him to confirm whether Johnson’s deal could therefore be fairly compared to the “hypothetical FTA” outlined in the earlier Brexit assessment.

Catherine McKinnell, a Labour MP and chair of the Treasury select committee, called on officials to immediately update the assessment if the Treasury no longer stood by the analysis ahead of parliament’s crunch vote this weekend.

She said the committee had asked for an update three months ago but still received no response.

Trade-offs between EU trade and deals with other countries

Simon French, chief economist at stockbroker Panmure Gordon, said revised estimates would be unlikely to significantly change the headline figure on its negative impact on GDP, saying it would still be “in the ballpark” of 4.9%.

But he said a fresher analysis by officials would be far more useful in revealing the likely trade-offs between a closer deal with the EU and greater “wiggle room” to secure better terms with other countries.

“We were told, and it’s right, that there are advantages to changing our regulatory system and doing trade with the rest of the world. But it comes at the cost of the depth and breadth of any FTA with Europe going forward,” he said.

“Will it allow EU fishing access to our waters in return for UK drug exports, say? What are the costs and benefits of having deep [EU] alignment or a third-country relationship?”

Talks on an EU trade deal have not even started

French said the past few years of divorce talks had revealed “almost nothing about the end state” of Britain’s future trading relationship with the EU, which will be negotiated during a post-Brexit transition period.

He also questioned Labour, other opposition parties’ and think tank warnings of a “race to the bottom” on workers’ rights, environmental standards and consumer protection under Johnson’s plans.

The IPPR think tank had said on Thursday the deal “opens the door to a decade of deregulation,” putting high regulatory standards and the NHS at risk in trade talks with US president Donald Trump’s administration.

But French said: “This deal provides the chance to take a different stance, but it doesn’t mean they will.”

He noted the EU could still insist on Britain accepting EU standards at a later date in exchange for a closer relationship.

A government spokesman said: “We will negotiate a comprehensive and ambitious FTA with the EU, which will be good for our economy and businesses.

“This stage of the negotiations has focussed on the withdrawal agreement rather than the future trade deal, the specific nature of which will be subject to the outcome of the next phase of negotiation.

“We will keep parliament updated throughout the negotiations, including providing analysis at appropriate times.”

By Tom Belger

Source: Yahoo Finance UK

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Bank of England deputy suggests Brexit deal could see rates rise

Deputy Bank of England governor Dave Ramsden has said he thinks gradually increasing interest rates could still be the right path if Britain achieves a smooth exit from the European Union.

Threadneedle Street has repeatedly struck a more hawkish tone than its American and European counterparts, saying it foresees “limited and gradual” rate rises unless Britain’s economy takes a downturn.

Ramsden spoke to Bloomberg yesterday after Prime Minister Boris Johnson announced a “great new” deal with the EU that would see existing trading arrangements stay as they are for at least a year while a new trade deal was reached.

“The kind of guidance we’ve been giving – in the world of a deal it still applies,” Ramsden said in the interview, published today. “We’re not saying over what timeframe, but limited and gradual is a reasonable qualitative framing.”

Ramsden’s view diverges from some of his Bank of England policymaker colleagues. Extern monetary policy committee (MPC) members Gertjan Vlieghe and Michael Saunders have suggested rates should be lower even in the event of a deal.

The BoE deputy said a Brexit deal and some certainty for UK businesses will lead to “some pickup in investment” and will bolster demand and “hopefully” productivity.

Business investment has slumped in 2019, with firms reticent to spend until there is greater certainty over Brexit.

Johnson’s new Brexit deal goes before MPs tomorrow in what looks set to be an incredibly tight vote. Ramsden said the BoE will keep an eye on currency movements after the vote.

By Harry Robertson

Source: City AM

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Brexit Deal Positive For UK Buy To Let Property Sector

The news yesterday from Boris Johnson that a new Brexit deal has been agreed should be a positive step for the UK buy to let property sector, taking away much of the uncertainty from the property market.

Leading figures from the property sector reacted positively to the Brexit deal news from the government.

Co-founder of ideal flatmate, Tom Gatzen, commented: ‘The news of a Brexit deal will bring relief to the many European renters currently residing across the UK. For many, the political purgatory caused by a protracted Brexit process has thrown doubt over their status to live and work in the UK and this has had a direct impact on their ability to rent, how long they can rent for and their commitment to enter into a lengthy tenancy agreement.

‘Although the devil will very much be in the detail of today’s deal, a light at the end of a very long, dark tunnel should go some way in stabilising this segment of the UK rental sector and we can now get back to living in happy, harmonious households.’

Founder and CEO of Springbok Properties, Shepherd Ncube, commented: ‘Hallelujah. Against the odds and in the face of doubters, a Brexit deal has now been done and the UK property market can emerge from its dormant state brought about by months of political uncertainty.

‘We don’t yet know the detail, of course, however regardless, the property sector will surely begin to breathe again on the basis of some level certainty being restored and this uplift in market activity should see the cogs of positive price growth and transactions start to climb once again.’

Director of London lettings and estate agent, Benham and Reeves, Marc von Grundherr, commented: ‘The political paralysis that the economy and in particular the housing market has endured these last few months has been torturous for would-be home sellers, buyers, estate agents, conveyancers and mortgage lenders alike.

‘London has certainly taken the brunt of this and while there are no doubt many details left to iron out, we can start to look forward and finally, beyond Brexit. This will bring about a notable change in the fortunes of weary London home sellers and the capital will now regain its title as the cornerstone of the UK property market.

‘Foreign investment has remained strong despite the current landscape, but this revival in domestic appetite will fill the tank and see the market shift through the gears, if not immediately, certainly as we see in a new year.’

Source: Residential Landlord

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Brexit deal hysteria sparks dramatic gains for UK stocks

London-listed companies with exposure to the domestic economy soared on Friday for their best day in nearly a decade as hopes that Britain can seal a Brexit deal triggered explosive gains and a major reversal of fortunes for the much-shunned UK market.

Investors pounced on everything from banks like RBS (RBS.L) to housebuilders and retailers such as Kingfisher (KGF.L), which owns DIY chain B&Q, after British Prime Minister Boris Johnson and his Irish counterpart, Leo Varadkar, said they had found “a pathway” to a possible Brexit deal.

The buying spree targeted some of the market’s most beaten-down stocks and those considered most vulnerable to a downturn in consumer spending if the country crashes out of the European Union without a deal.

The FTSE 250 .FTMC surged 4.2%, while the Dublin bourse .ISEQ, often considered a barometer of Brexit sentiment, jumped 3.7% to its highest since May.

Source: UK Reuters

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Brexit deal hopes push pound to highest in over three months

Sterling surged on Friday as investors rushed to reprice the prospect of a last-minute Brexit deal, after the European Union gave its chief negotiator the go-ahead to re-open negotiations with London.

The pound has rallied more than 3% since Thursday, its biggest two-day gain since mid-June 2016, before the British public voted to leave the EU. On Friday, it surged by more than 2% to a three-and-a-half-month high.

Many investors were positioned for another Brexit delay as the most likely outcome, believing that the chances of an agreement before the end of October were virtually zero. The surprising news that talks were back on squeezed those betting against the pound, exaggerating the move higher, traders said.

EU Brexit negotiator Michel Barnier said on Friday that he’d had a “constructive” meeting with his British counterpart, Stephen Barclay, and the 27 countries in the EU gave him the go-ahead to try and agree withdrawal arrangements before the Oct. 31 deadline.

Barnier told member states that Britain has changed its position and now accepts that there cannot be the customs border on the island of Ireland, two EU sources said.

That followed a meeting on Thursday between the Irish and British prime ministers, who released a joint statement saying they could see “a pathway to a possible deal”.

The pound jumped 2% to $1.2708, its highest since late June at GBP=D3, in late London trading. It gained as much as 1.6% to 87.03 pence against the euro EURGBP=D3.

British stocks also rallied, gilt yields rose and money markets no longer fully priced in a 25-basis-point cut in interest rates by the Bank of England before December 2020.

Derivatives traders also regained confidence in the pound, with bullish bets exceeding bearish views on Friday for the first time since January 2018, according to the currency derivatives market, suggesting further gains for sterling.

Traders scrambled to cover positions amid the newfound optimism that a Brexit deal would be reached, said Kenneth Broux, FX strategist at Societe Generale.

“I think it’s very important to specify that sterling liquidity is very thin so volatility is high,” Broux said.

But he added that given the broadly bearish positions in sterling markets, “the obvious conclusion is that we’ll see a squeeze higher”.

Frederik Ducrozet, a strategist at Pictet Wealth Management echoed these sentiments. Irish officials have raised expectations for a deal, he said, and “if you get a path to a deal, there could be a massive squeeze in rates going higher and a re-steepening of yield curve.

“If that’s the case, then what we’ve seen today could just be the beginning of a bigger move,” Ducrozet said. “But we have been here before, so expectations may be a bit more limited.”

`TIME IS PRACTICALLY UP’
Despite the flurry of activity, it remains uncertain on what terms the UK will leave, when, and even whether it will do so at all.

Sounding a more cautious tone, top EU official Donald Tusk said “time is practically up” for Britain to reach a Brexit deal. That hurt the pound temporarily.

One dealer in London attributed price swings to “algos” – or computer-generated trading algorithms – in a headline-driven market.

Hopes are that a meeting between British and EU negotiators will pave the way for a Brexit transition deal at an Oct. 17-18 summit.. But some doubt Johnson will get the agreement past Britain’s parliament.

Deutsche Bank’s forex strategist George Saravelos said he was “turning more optimistic on Brexit” and no longer negative on the pound, while JPMorgan said the Anglo-Irish statement may have “changed everything”.

(For a graphic on ‘Sterling holds onto Thursday’s gains’ click tmsnrt.rs/2Mt66aq)

The sterling rally undermined UK’s export-heavy FTSE 100 .FTSE stocks index, but domestically focused UK retailers, banks and housebuilders benefited, rising 4% to 6%.

Irish stocks also rallied. Irish government bond yields fell .ISEQ IE10YT=RR.

Reporting by Elizabeth Howcroft

Source: UK Reuters