21/12/2016
The pound and Brexit: 2017’s unenviable guessing game
Sign In
Subscribe
Pound Sterling
The pound and Brexit: 2017’s unenviable guessing game
UK economy has avoided recession but markets are anxious about next year’s exit talks
4 HOURS AGO
by: Elaine Moore and Roger Blitz
The vote for Brexit (http://next.ft.com/content/9ec6ccec­c5ce­11e6­8f29­9445cac8966f)
will change the course of Britain’s history, Philip Hammond announced last month. The
UK chancellor may be a strident advocate for a “soft” (http://next.ft.com/content/b898a
cd8­c134­11e6­81c2­f57d90f6741a) departure from the EU but he has also been keen to
paint a positive picture of the country’s economy, saying the UK’s fundamental strengths
will “ensure our future success”.
Financial markets are sceptical. The economy may have confounded doomladen
predictions (http://next.ft.com/content/bab284e4­9c1d­11e6­a6e4­8b8e77dd083a) of
recession and market seizures in the immediate aftermath of the June vote, however any
sense of relief is yielding to bleak predictions for 2017.
The pound remains 17 per cent lower against the US dollar than it was before the
referendum — weakness that Charles Goodhart, a former Bank of England policymaker
https://www.ft.com/content/a46ab688­c220­11e6­9bca­2b93a6856354
1/8
21/12/2016
The pound and Brexit: 2017’s unenviable guessing game
and professor of finance at the London School of Economics, says illustrates the way in
which investors have marked down the UK’s economy.
They are positioned for further weakness in the pound, with the currency viewed as
being vulnerable to another sharp decline when prime minister Theresa May finally
sends the EU the Article 50 letter that formally activates divorce proceedings.
At the same time, British government bonds have become ensnared in a global debt
market retreat (http://next.ft.com/content/89749798­aa49­11e6­a0bb­
97f42551dbf4)with sliding prices pushing up yields. As inflation expectations rise across
developed world markets, the UK story is compounded by sterling’s large drop.
Not surprisingly, holders of gilts have suffered the biggest total return losses (http://nex
t.ft.com/content/eca532dc­9ce8­11e6­a6e4­8b8e77dd083a) in developed world bond
markets between the end of August and beginning of December.
Even UK equities are reflecting the sombre mood and not benefiting from money
managers rotating money from bonds into shares.
The pound’s fall may have helped large companies that generate most of their earnings
overseas but members of the blue­chip FTSE 100 and smaller FTSE 250 have failed to
https://www.ft.com/content/a46ab688­c220­11e6­9bca­2b93a6856354
2/8
21/12/2016
The pound and Brexit: 2017’s unenviable guessing game
keep pace with the rally in US markets that pushed all major Wall Street indices to
record highs in December.
“The US is leading a reflation trade in which investors switch from bonds to equities in
the expectation of greater growth and inflation. The UK isn’t telling the same story,” says
David Riley, senior portfolio manager at BlueBay Asset Management. “We’re looking at a
situation in which economic growth is stagnant yet inflation is rising. This is a terrible
combination for investors in which neither equities nor fixed income perform well.”
Even if EU negotiations limit political “fallout” next year, the International Monetary
Fund predicts UK growth will be just 1.1 per cent (http://next.ft.com/content/5bdde608­
8a1f­11e6­8cb7­e7ada1d123b1)in 2017 — half the previous forecast. Meanwhile, inflation
is expected to outstrip the Bank of England’s 2 per cent target.
Adding to the anxiety around the UK outlook, the central bank support that acted as a
ballast to asset prices in the wake of the vote for Brexit is losing its shine.
On the morning of the EU referendum result, with financial markets in tumult, the
political architects of Brexit absent and Prime Minister David Cameron having
announced his resignation, BoE governor Mark Carney appeared on television and told
the public (and markets) that everything was under control.
https://www.ft.com/content/a46ab688­c220­11e6­9bca­2b93a6856354
3/8
21/12/2016
The pound and Brexit: 2017’s unenviable guessing game
“The market response was textbook,” says Iain Stealey, fixed income portfolio manager
at JPMorgan Asset Management.
“Things eased as people realised that the Brexit process would take time and the
economy had not immediately fallen off a cliff. Once the BoE and ECB [European Central
Bank] were making soothing noises people began buying again.”
That support is now less forthcoming. The BoE is not currently expected to ease further,
and the ECB has announced its bond­buying programme will be extended via smaller (ht
tp://next.ft.com/content/db64606a­bd3b­11e6­8b45­b8b81dd5d080) monthly
purchases next year.
With the cushioning effect of central bank support deflating, markets are left with the
unenviable challenge of speculating on how Brexit negotiations will proceed.
Markets year in review
The big events that shook financial markets in 2016 (http://next.ft.com/content/6d
24125c­c066­11e6­9bca­2b93a6856354) 2016’s biggest one­day market wobbles (http://next.ft.com/content/37c6841e­c5ed­
11e6­9043­7e34c07b46ef)
FT Markets quiz: the turbulent times of 2016 (https://ig.ft.com/sites/quiz/markets­
qoty2016/) https://www.ft.com/content/a46ab688­c220­11e6­9bca­2b93a6856354
4/8
21/12/2016
The pound and Brexit: 2017’s unenviable guessing game
A hard Brexit that does not give companies time to adapt is considered the worst­case
scenario — one that would create economic and financial disruption, warns Wouter
Sturkenboom, investment strategist at Russell Investments.
There is, however, an alternative scenario. If anti­elite sentiment dominates next year’s
elections in the Netherlands, France (http://next.ft.com/content/2bbff644­af60­11e6­9c
37­5787335499a0) and Germany (an election in Italy (http://next.ft.com/content/9b9d9
ad0­ba6d­11e6­8b45­b8b81dd5d080) is also possible), the EU may be obliged to adopt
what Steen Jakobsen, chief economist at Saxo Bank, calls “a more co­operative stance
towards the UK”.
Economic data may also remain better than expected and any signs a Brexit transitional
deal is possible would soothe short­term concern. Donald Trump’s arrival at the White
House could herald a bilateral US­UK (http://next.ft.com/content/1632b2c6­a673­11e6­
8b69­02899e8bd9d1) trade deal, as well as increasing what strategists at Bank of
America Merrill Lynch call “the geopolitical importance of the UK for the rest of the EU”.
Sterling tail risks are “skewed to the upside” and the bank’s analysts recommend selling
the euro against sterling.
Then there’s the outlier scenario. In its annual outrageous predictions for the new year,
Saxo Bank includes the possibility that “Brexit never happens”.
Far­fetched? Recommending a trade of buying sterling against the yen, Jordan
Rochester, currency strategist at Japanese bank Nomura, says “with politics, one cannot
rule anything out”. 2016 was the year politics “stumped the consensus”. Why not 2017?
Print a single copy of this article for personal use. Contact us if you wish to print more to
distribute to others. © The Financial Times Ltd.
Latest on Pound Sterling
Fast FT
Pound takes no solace from Theresa May Brexit transition
talk
Fast FT
https://www.ft.com/content/a46ab688­c220­11e6­9bca­2b93a6856354
5/8
21/12/2016
The pound and Brexit: 2017’s unenviable guessing game
Pound skids 1% to nearly one-month low under $1.24
Fast FT
Pound now looking ‘expensive’ says Deutsche Bank
Promoted content by CME Group
Energise your trading portfolio with futures
Oil futures give you a new way to diversify your strategy
Latest in Capital Markets
John Redwood
Repairs needed across Europe as concerns continues to rise
Repairs are needed across the continent, but money is in short supply
3 HOURS AGO
Age of the ETF
The hopes and fears around bond ETFs
Advocates say they add liquidity while sceptics point to potential for compounding volatility
3 HOURS AGO
The Short View Katie Martin
Take no chances on a repeat performance by the Swiss
https://www.ft.com/content/a46ab688­c220­11e6­9bca­2b93a6856354
6/8
21/12/2016
The pound and Brexit: 2017’s unenviable guessing game
The risk of missing another sudden franc rally is not worth it
Follow the topics mentioned in this article
Capital Markets
Markets
Brexit
Follow the authors of this article
Roger Blitz
Elaine Moore
Take a tour of myFT
https://www.ft.com/content/a46ab688­c220­11e6­9bca­2b93a6856354
7/8
21/12/2016
The pound and Brexit: 2017’s unenviable guessing game
https://www.ft.com/content/a46ab688­c220­11e6­9bca­2b93a6856354
8/8