Brexit

Brexit could result in the biggest economic and political shift in recent British history. Find out what it means for the markets and take a position with IG.

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When will Brexit happen?

The UK is expected to officially leave the European Union (EU) on Friday 29 March 2019. Subject to final approval by both sides, a 21-month transition period will then begin.

During this period the UK will continue to abide by certain EU treaties, without a formal say on how rules are applied or developed, while finalising the post-Brexit arrangements. This transition period will end on 31 December 2020, at which point the final agreement will come into force.

How will Brexit affect traders?

The prospect of Brexit is already having a strong effect on financial markets and traders, as the UK government attempts to negotiate new economic agreements before it leaves the EU. How the markets are affected in the build-up will largely depend on how traders perceive negotiations to be progressing (see ‘ markets to watch’), with longer term effects dependent on whether Britain leaves on ‘hard’ or ‘soft’ terms.

Hard Brexit

A hard Brexit, favoured by many in the leave camp, would likely mean leaving the single market and taking back control of borders and legislative powers. But, in extremis, it might require Britain to leave without a deal to trade under World Trade Organisation (WTO) rules and tariffs. 

Proponents argue that the economic benefits of being able to form new trade deals with other countries would outweigh any negatives resulting from reduced trade with Europe.  However, these new trade deals could take years to negotiate and formal talks with other countries can’t start until the transition period starts, so the UK’s economy could slow down in the short term if a ‘no deal’ scenario emerges. This could hit sterling, and have repercussions for bonds and stocks.

Soft Brexit

A soft Brexit, favoured by many in the remain camp, might see Britain try to maintain close ties to the European Union. There are various options, including joining the European Economic Area (EEA) to remain a member of the single market (like Norway, Liechtenstein and Iceland), or negotiating a free trade agreement (like Switzerland).

However, free trade with the EU would probably require Britain to accept the free movement of people and certain EU regulations, which the government has ruled out. For these reasons, Britain is expected to target an alternative free trade model, with the aim of maintaining preferential access to the EU’s market without some of the regulatory burdens. If successful, any deal of this nature may increase economic certainty, boosting demand for stocks and sterling. 

Markets to watch

The effects of Brexit on the UK and European economies could be wide ranging.

As the leave date approaches, the markets will be susceptible to perceived successes and failures at the negotiating table, as the uncertainty is priced in and traders look to hedge risks.

So what are the key markets to watch in the build up to Brexit? 

Forex

Sterling fell against the euro after the referendum results were confirmed, but there has been significant back and forth since the beginning of October 2016 – with moments of recovery quickly offset by a loss in confidence as the markets track the news. Bank of England announcements will continue to have a major impact as the Bank seeks to restore confidence, though traders won’t be fooled by forced smiles. Keep an eye on major pairs like EUR/GBP and GBP/USD, but remember that Trumponomics may take centre stage as far as the dollar is concerned. 

Indices

The FTSE 100 and FTSE 250 both rose over the course of 2017, thanks to weak sterling performance and an improving UK economy. However, in the first quarter of 2018 both have been volatile as a result of selloffs on global equity markets and the intensifying pressure of Brexit. The trading relationship with Europe after the transition period will be critical to many firms’ future earnings, so indices are very likely to be affected by the terms of the final agreement.

Markets Bid Offer Change
GBP/USD
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EUR/USD
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FTSE 100
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FTSE Mid 250
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Germany 30
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Spot Gold
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Prices above are subject to our website terms and conditions. Prices are indicative only.

Commodities

As ever in times of uncertainty, all eyes turned to gold after Britain voted in favour of Brexit. The metal didn’t disappoint, climbing above $1300 following the vote. However, this didn’t last long. Gold fell to its lowest level in over ten months after the Federal Reserve announced a rate increase in December 2016, underscoring that Brexit plays second fiddle to US policy. But if the president can’t implement his agenda, Brexit could play a key part in driving a bull market for the yellow metal.

Shares

The effect on shares has been mixed. Some companies have benefitted from a weaker pound and improved economic outlook, and others have struggled. But the news that  Goldman SachsHSBC and  UBS intend to move operations from London could be a sign of things to come. A number of listed companies may start to make similar decisions that could have a major impact on their share prices, and it will be up to the most astute traders to respond the moment they do. 

Brexit: what's happened so far?

More than 30 million people voted to leave the EU on 23 June 2016, with leave winning by 51.9% to 48.1%. The difference was 1.3 million votes.

There was a significant regional variation in the vote: London, Scotland and Northern Ireland all backed remain, while England and Wales opted to leave, with 53.4% and 52.5% of the vote respectively. All in all, the vote revealed a deeply divided Britain: a fact which defined the following months of negotiations, challenges and reprisals.

The result took the government by surprise. David Cameron resigned from number 10, and was replaced by Theresa May following a leadership contest within the Conservative Party. She confirmed that the UK would leave the EU with her famous ‘Brexit means Brexit’ soundbite.

Triggering article 50

After a period of planning, the prime minister announced Britain’s negotiating objectives for exiting the EU in January 2017. The focus: British sovereignty, a lack of hard borders between Northern Ireland and Ireland, control of immigration, the future rights of British nationals in the EU and EU nationals in Britain, free trade with Europe, and trade deals with other countries.

Article 50 was finally triggered on 29 March 2017, starting the official two-year countdown to Brexit. What followed was a period of planning by EU and UK negotiators, lasting until June 2017 when negotiations began. In the interim, Theresa May called a snap election, hoping to boost the Tory’s parliamentary majority and strengthen the government’s bargaining power with EU leaders.

The plan backfired spectacularly, however, as the Conservatives lost their majority and were forced to form a coalition with the Democratic Unionist Party (DUP). Some argue this has weakened the government’s negotiating power and will force Britain to pursue a softer Brexit (as parliamentary approval of the final deal is required).

Brexit negotiations

Negotiations officially began on 19 June 2017, with the UK accepting a phased negotiation timeline suggested by Michel Barnier, the EU’s chief negotiator. Phase one concluded in December 2017 with the following terms agreed in principle:

  • Financial settlement. The UK will pay a ‘divorce bill’ in the region of £35-39 billion to the EU to cover existing obligations
  • The Irish border. There will be no hard border between Northern Ireland and Ireland, though how this is achieved will depend on the terms of the final deal
  • Citizens’ rights. EU citizens living in the UK – and UK citizens living in the EU – prior to Brexit will retain many of the rights afforded to them under EU law

Phase two is ongoing and is focused on the future relationship between the UK and the EU, including the future trading relationship. This phase is expected to run until October 2018, leaving time for the terms of the final withdrawal agreement to be ratified by the UK parliament, and the European Council and Parliament, before the leave date. As part of this phase of negotiations, a transition period of 21 months has been provisionally agreed, which is scheduled to start immediately after the leave date.

This transition period has been controversial among hard Brexiteers as Britain will be subject to the majority of EU rules and regulations for its duration – including the free movement of goods, services, people and capital – but won’t have a formal say on their application or development.

However, its proponents say it will provide a degree of continuity to businesses and citizens, and give time for the more minute details of the future relationship between the UK and EU to be discussed and agreed. Britain will also be free to negotiate new trade deals, which would come into force after the transition period ends.

Key Brexit negotiators

The EU has appointed Brexit negotiators representing its three main institutions – the Commission, Council and Parliament. The key negotiators are:

Name Position
Michel Barnier European Commission chief negotiator
Didier Seeuws European Council head of the special task force on the UK
Guy Verhofstadt European Parliament chief negotiator

 

The UK has appointed Brexit negotiators from its department for exiting the European Union, cabinet office and civil service. The key negotiators are:

Name Position
Dominic Raab Secretary of state for exiting the European Union
Oliver Robbins Prime minister’s Europe advisor
Sir Tim Barrow Permanent Representative of the United Kingdom to the European Union

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