London and Brussels agree terms of UK departure from EU

In a flurry of activity and warnings of dire consequences, the agreement between London and Brussels for the UK to leave the European Union is finally complete. It now falls to the individual nations, the twenty-seven remaining members and the UK to add their approval to the terms.

There may be several alterations, mostly cosmetic, requested by the remaining nations but judging by the furore around Westminster from yesterday afternoon, it seems highly unlikely that it will pass in its current form in the UK.

There have been several comments from prominent Brexiteers and members of the opposition savaging a report they haven’t yet had sight of. As has been the case for some time, the questions of the Irish border and the “backstop agreement” remain the major points of contention. Former foreign Secretary Boris Johnson labelled the agreement “the worst possible outcome, an agreement which ties the U.K. to the EU in perpetuity with the U.K. abiding by rules despite the fact it has had no input in their creation”.

The pound had an extremely volatile day yesterday as rumour and counter rumour swept the market. Announcements that UK citizens would not need visas to visit Europe, but that the UK would be excluded from climate change cooperation post-Brexit were merely appetizers in advance of the main dish. It reached a high of 1.3048 before settling back to close at 1.2955. Overnight it has remained volatile reaching 1.3037 before again falling below 1.3000. It is currently (05.45GMT) trading at 1.2987

Cabinet ministers will meet later today (14.00GMT) to discuss the agreement with the Prime Minister and, hopefully, find consensus. An emergency EU summit is expected to be announced for the end of the month with MP’s getting a chance to vote on the deal before year end. That will be the apex of the Prime Ministers woes with both sides in the debate seemingly certain to vote it down.

Away from Brexit, the UK employment report was release with wage inflation reaching its highest since 2008 at 3.2% and a small rise in jobless claims. Today sees the release of the inflation report with the headline likely to have climbed back to 2.5%

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Italy remains on collision course

Brussels deadline for Rome to amend its 2019 Budget from the original 2.4% of GDP came and went yesterday with more powerful rhetoric from Italian deputy Prime Ministers but little reaction from the EU Commission. The reasoning behind Rome “digging its heels in” is less basic than a desire to defy Brussels. The Prime Minister Giuseppe Conte commented that the budget is necessary “to get Italy going again”. His government is of the opinion that the economy will die a slow death if it remains tied to the EU’s austerity plans.

Pre-Eurozone, the Southern European countries were characterized by severe market volatility, high interest rates and high inflation. This often led to currency crises where a devaluation led to an export led recovery and the entire process rebooted and started again.

The constraints of the growth and stability pact have not suited such economic plans yet it has taken close to twenty years for a sufficiently nationalistic Government to be elected to defy the restraints. It looked as though Greece may be the first but it ultimately decided to toe the line despite the departure of its Finance Minister in disgust.

The single currency rose marginally from its 2018 low yesterday, closing at 1.1285. It rallied further overnight but it has given back those gains and is trading close to yesterday’s close.

Dollar pauses for breath

The dollar index fell to a low of 97.08 yesterday, closing close to that level. Despite the volatility “across the pond”, the dollar remains affected by domestic issues like monetary policy and equity prices.

Analysts expect the dollar strength to return and yesterday’s setback to be simply a correction as weak longs took profit.

With another hike expected in December and further advance guidance likely for H1 ‘19, the dollars path remains fairly clear. There are rumours that China is open to the restart of trade talks which should avert any escalation of the trade war in the short term, although experience suggests that talks between the two are as likely to end in stalemate as they are of a deal being struck.

The hostile relationship between Presidents Trump and Macron which seemed to have thawed a little at the weekend when the two met in Paris, returned to the ice age yesterday, as Trump suggested that before the U.S. intervened in both World Wars, the French were “preparing to learn German”!