Brexit Negotiations: How Will the Market Respond?

We're in the midst of one of the most chaotic times in British politics in decades.

After more than a year of negotiations Theresa May hammered out a tentative EU deal and her cabinet approved it. Some of her ministers, however, resigned in protest. On Nov. 25, EU members signed off on the deal, which now awaits approval from British Parliament. The outstanding issues include: Immigration, the Irish border, EU law, healthcare, the environment and air travel among others. But how will the current Brexit situation affect the markets?

Global Implications of 'No Deal'

The European Union is one of the world's most powerful economic blocs. How and when the U.K. leaves the EU will have implications around the globe. One of the biggest concerns is that this may make it harder to strike new trade deals with other major economies such as the United States. The U.K. is America's closest political ally and this political chaos is not helpful for the United States as China closes the global economic gap with the EU and the U.S.

Here are the facts: Just under half of the U.K.'s exports go to the EU and just over half of its imports come from the other 27 nations in the bloc. The U.K. is America's seventh biggest trading partner and the U.K. is the fifth biggest national economy in the world. The U.K. is the fourth largest importer of U.S. goods and services in the world, behind only Canada, Mexico and China. The EU felt it had to take an especially tough stance with the U.K., since it wants to avoid other countries thinking about a similar exit from the EU. Markets do not like instability and the potential instability from a "no-deal" Brexit has global economic implications.

Sterling Volatility

Following the U.K. cabinet resignations, the sterling had its biggest one-day loss against the euro and the dollar in two years. The pound is trading almost 14 percent lower than on the day of the referendum and further weakness in the sterling is forecast if the Brexit deal goes off the track. Currency traders expecting trouble with getting U.K. parliamentary approval are placing increasing positions against the pound, and S&P estimates the pound will drop another 15 percent against the dollar on a "no-deal." However optimistic traders predict the sterling could rally against the dollar if, and only if, it gains parliamentary approval.

Back in June 2016 when the unexpected vote of "leave" won in the Brexit referendum, global markets panicked. Both European and U.S. markets sold off sharply, though U.S. markets rallied shortly thereafter. Volatility in the current marketplace is at a completely different level and a "no-deal" decision could send the markets tumbling.

Companies in Britain and the EU have spent months preparing for a chaotic Brexit and their biggest fear is a "no-deal" Brexit where the U.K. storms out of the EU, leading to new trade barriers. The thought of this scenario is of paramount concern to business people in Britain and all across Europe. This could lead to consumers facing higher prices and reduced availability of many everyday products.

What Next for the U.K. Economy?

The U.K. economy slowed following the Brexit vote, but has managed to avoid an all-out recession. Investment also slumped dramatically. Economists say a Brexit deal would boost the stagnant U.K. economy and lift economic growth in 2019. However, a "no-deal" could send the economy into a prolonged recession.

Regardless of the type of Brexit, it is likely there will be a less stable Europe. A messy Brexit could lead to a range of geopolitical risks, and a smooth Brexit could embolden anti-EU political factions in other nations to seriously consider whether they might want to follow the U.K.'s lead.

Written by Scott Bauer. Read more from the author here.

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(This article is sponsored and produced by CME Group, which is solely responsible for its content.)

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