Brexit Updates And Its Impact On Gold, Pound And Share Markets

  • Aug 21, 2019 BST
  • Team Kalkine
Brexit Updates And Its Impact On Gold, Pound And Share Markets

Uncertainties related to the Brexit are deepening further. As on August 20, 2019, the European Union discarded British Prime Minister's demand to reopen the backstop negotiations. In response to the demand raised by Boris Johnson, the European Union commented that the UK had failed to come up with any proper realistic alternative arrangement to an insurance policy for the Irish border.

In a four-page letter written by British Prime Minister to European Council President Donald Tusk in which he asked him to remove the "Irish backstop" from the divorce deal. Prime Minister Johnson argued that the Irish backstop- which is a part of Divorce Agreement that then prime minister Theresa May agreed upon, should be replaced with a "commitment" to execute other alternatives as part of a deal on the after-divorce relationship.

Meanwhile German Chancellor and one of the most powerful leaders in Europe, Angela Merkel, commented that Divorce agreement which contains the Irish backstop, should not be changed and European Union should consider practical solutions for this, as it is a matter of our future ties with the UK and I believe we will respond in a very unified way.

She also added that the moment we would have practical solutions, we don’t need any backstop anymore and EU is ready to find a solution.

Recently the European Union Council President Donald Tusk tweeted that, “Those who are not in favour of the backstop and not suggesting any realistic options, in fact support renewing a border. Even if it is not accepted by them.”

Meanwhile, Boris Johnson said that the European Union would not provide any concession which the UK is seeking, as long as they believed there would be chances that the British Parliament could block the divorce deal. He also added that the Irish border backstop was non-democratic and was putting Britain's dominion in danger, as the application of single-market law in Northern Ireland could separate the area from the remaining of the UK.

With Political crisis deepening in London, Mr Johnson called a gathering of G7 leaders on Saturday, 24 August 2019, as the UK has less than three-month time to come out of the EU bloc, which is scheduled as on 31 October 2019. The three-day-long gathering in France will reveal new realities for the UK.

With continuous attempts made by the British prime minister to re-negotiate previously discussed Brexit deal, which was ruthlessly rejected by the British Parliament three-time, Brussels had said it can't re-negotiate upon. Which reflects a no-deal Brexit is very likely an outcome.

Sterling Pound pared some of its losses in the August 20, 2019 market session post-German Chancellor comments

Meanwhile, Brexit sensitive Sterling Pound pared losses it registered on August 19 after German Chancellor commented that "EU is ready to find a practical solution to the Irish backstop" and it ended 0.30% higher against the US dollar at 1.2163 in the August 20 session. However, it is again hovering in red and was quoting 0.18% lower against the US Dollar at 1.2147 (as on August 21, 2019, before the market close). In the last one-month, Sterling has tumbled more than 2.8% against the US Dollar. However, Sterling was quoting 0.24% higher against the Euro to 0.9141 (at the time of writing, at 10:36 AM GMT).

Recently as on August 13, 2019, the Office for National Statistics (ONS) reported its Job market data for the three-month period ended June 2019. It reported that the UK had achieved a joint-highest employment rate on record after the beginning of comparable records in 1971. UK employment rate for April to June 2019 period was estimated at 76.1%. The unemployment rate was estimated at 3.9%, slightly lower than 4.0% from the year-ago period, although on a quarter-on-quarter basis, the unemployment rate increased by 0.1 percentage point. The UK economic inactivity rate touched a joint record low of 20.7% during the period of April -June 2019.

Labour market data is not likely to have a very substantial impact on the Pound or monetary policy decision as the Bank of England’s (BoE) hands are tied against uncertainties related to UK’s withdrawal from the EU bloc.

Brexit related uncertainties weigh heavily on sterling, and it will continue to put pressure on it. The currency is falling since Boris Johnson made a statement to take Britain out of the European Union with or without a deal. In the month of July 2019, the Sterling plunged more than 4.0%, the highest decline since October 2016. Since the Brexit referendum took place on June 2016, sterling has given up more than 16% of its value.

Therefore, the movement in sterling is not much dependent on the labour market data, and the associated risk is skewed to downside vs the Euro and Dollar with disorderly Brexit very much in sight. The latest wages and employment data would in normal times make the Bank of England prepare the market for a round of rate hikes. However, with the British economy sliding gradually, due to Brexit related fog, the economy needs a stimulus. There is a greater possibility that a rate cut will follow Britain's divorce from the EU on 31 October 2019, and this is likely to be debated at the next BoE meeting.

Many economists and market analysts commented that given the increased chances that Britain will ultimately crash out of the European Union bloc without any formal deal, the chances of the Pound Sterling plunging with respect to the US dollar is becoming a more plausible topic of debate by the day. Newly appointed British Prime Minister Boris Johnson, in his role for less than a month, is now left to face critics rather than take concrete steps in order to prepare the economy for a possible no-deal Brexit. He should focus on government spending in order to stabilise the pound at the current rate.

However, falling Sterling has jolted market sentiment with investors shifting to safer asset classes. This has led to a steep plunge in the mid-cap, small-cap and AIM segments of the London Stock Exchange. Also, these segments are highly exposed to the risks related to falling Pound as their majority of revenue comes from outside of the UK. Import based companies are suffering the most, as a devaluation of the currency has inflated their import bills, and this would continue to prevail amidst rising chances of a no-deal Brexit.

FTSE 100 paring losses it booked on August 20, 2019

In the August 20, 2019 trading session, the FTSE 100 index ended the session 64.65 points or 0.90% lower at 7,125.0, as Boris Johnson demand to reopen withdrawal talks was rebuffed by the Brussel. On August 20, 2019, FTSE 250 index- a market capitalisation weighted index comprising of 101st to 350th large companies listed on the London Bourse slumped 89.88 points or 0.47% to 19,008.09. However, in the August 21 market session (before the market close), the broader index of 100-large companies listed on the LSE, the FTSE 100 was paring losses of previous day’s session and was trading 76.72 points or 1.08% higher at 7,201.73 and FTSE 250 index gained 158.52 points or 0.83% against the previous closing level. With, Tui AG (LSE: TUI), Burberry Group Plc (LSE: BRBY), and Ocado Group Plc (LSE: OCDO) among the top movers on the FTSE 100 index, up by 4.05%, 3.22% and 2.92% respectively (before the market close).

Yellow metal prices are falling in the International market

Amid increased optimism over the United States and China settling a trade deal, it provided some stimulus to the investor's sentiment, as ongoing trade tension is considered to be the root cause behind the global meltdown. On August 21, market session, gold prices have given away approximately $5.0 or 0.34% against the previous closing level and were trading at $1,5110.45/ounce. In the past one year, Gold prices have touched a 52-week high price of $1,546.1/ounce and a 52-week low of $1,506.65/ounce respectively, and on a YoY basis, gold price was up by approximately 23.3%.

In the bond market, UK’s 10 Year Government bond yield was quoting higher against the previous close at 0.472, and the US 10 Year bond yield was also trading up at 1.588, post optimistic comments from the US President, as both US and China are negotiating a trade deal. Recently, some classic recession signals have appeared as 10 Year US bond yield fell below the 2 Year US bond yield or inverted yield. This earlier emerged in 2007, a year before the financial crisis hit the global market. If short-term bond yield crosses long-term bond yield, it reflects that investors are expecting higher risks in the near term.

However, Britain is facing multi headwinds, some of those are coming from the global market, while some of them are internal, made in the UK. Post-EU bloc rebuffed further talks on the withdrawal deal; it is very likely that the UK will crash out of the EU bloc on October 31, 2019, without any formal deal.

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