LCG: Brexit game of chicken

LCG: Brexit game of chicken

2 oktober 2020

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Britse vlag.jpg

By Jasper Lawler, Head of Research, London Capital Group

  • UK hit with a lawsuit and British pound hit by selling
  • Oil price slumps back toward September low on reports of higher OPEC supply
  • Non-farm payrolls preview- stimulus uncertainty means there are risks to markets from a good jobs number as well as a bad one.

Brexit lawsuit

The British pound dropped on the news the EU took the bait for a game of chicken with the UK. Chicken is not typically the animal of choice in financial markets - where bulls and bears are preferred. The GBP/USD weakness coincided with its second failed attempt to break above 1.30 in as many weeks.

The drop in Sterling was not too dramatic since the EU had been quick to say they would turn to legal action after the Internal Markets Bill was first tabled. Inevitably there was some disappointment when the lawsuit dropped. The better mood music in the trade negotiations had led some to think the EU didn’t need the lawsuit - at least not yet.

So is a trade deal less likely now? We’re not convinced by the idea that good faith is needed to strike a deal in the case of Brexit. The opposing ideologies and political incentives were always going to make it acrimonious. If a deal does get done, it will be borne out of necessity and national interest- not out of a desire to be friends. A deal under most scenarios must be Sterling-friendly but a lot can happen in two weeks before Boris’ October 15 deadline.

Oil gets crunched

The price of oil took a big hit on Thursday with Brent and WTI crude futures sliding over 4%. If one were to look at just oil as a guide to economic expectations, things could be in for a turn for the worse.

A Reuters survey showing higher OPEC output through September completely countered the narrative that the cartel was turning the screw on non-compliant members. OPEC’s last interim meeting had made bold statements about a crackdown that doesn't seem to have materialised.

Without the small prospect of the tighter supply, we’re left with the deteriorating demand outlook brought on by higher coronavirus cases. Add in a risk-off mood across markets because of no US stimulus, Brexit and the US election and oil could have a tough Q4.

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