Brexit in the week from 30/3 – 5/4/2020

What is currently moving the markets is not Brexit, but the coronavirus. The Brexit negotiators are quarantined, so the Brexit negotiations are stopped. By the end of June, the parameters of the trade agreement must be clear, but this is not in sight yet. The risk of Brexit without agreement as of December 31, 2020 is therefore increasing. Meanwhile, economic indicators in Britain signaled a strong deterioration in the economic situation. At the same time, the number of the coronavirus cases is on the rise. More details in our article.

Fundamental analysis

There are more than 48,000 infected in Britain and it shows how strongly Britain initially underestimated the situation by failing to make effective testing in time. Brexit may be the reason why people testing was not initiated earlier. According to some analysts, the British government did not want to show how much Britain is dependent on the EU. The situation began to calm after the Minister of Health declared that Britain would conduct 100,000 tests a day, ten times more than at the end of March.

In any case, Brexit causes problems in solving this pandemic in Britain, both from a practical and political perspective. Until June 30, 2020, the British government can ask the EU to extend the deadline for negotiating a trade agreement if it is clear that it is not possible to conclude the agreement by the end of the year. However, the request for an extension of the deadline may be a major political defeat for Prime Minister, because if it is extended to 2021, it will mean another year where Britain will have to contribute to the EU budget, but without the possibility of influencing the EU policy.

However, from a practical point of view, there are strong reasons for extending the deadline, as Britain is importing a large number of medical and sanitary supplies from the EU needed to deal with the pandemic. However, if the EU-UK agreement is not negotiated and the term is not prolonged, a trade between the EU and Britain will be subject to WTO tariffs after December 31, 2020 and a no-deal Brexit scenario will happen. This will make European imports more expensive in Britain and probably delays in supply too. 

In any case, the current situation is that due to the coronavirus, negotiations on the EU-UK trade agreement have been halted and the planned videoconference has not taken place. The EU negotiator, Michael Barnier, has contracted COVID-19 and his British counterpart, David Frost, is quarantined after showing symptoms of infection. Boris Johnson was also hospitalized with coronavirus.

From the important macroeconomic data point of view, UK consumer confidence data in the economy was reported on Tuesday, better than expected, reaching -9 versus expectations – 15.    GDP for Q4 2019 is 1.1%, in line with expectations of analysts. PMI indicators showed a deterioration in the British economy. PMI in production reached 47.8 (previous month it was 51.7), PMI in services fell to 34.5 (previous month 53.2).

More record data came from the USA, when the number of claims for unemployment insurance exceeded 6,600 thousand and increased by 100% compared to the previous week. On Friday, NFP data on the labor market negatively surprised, when the value of - 700 thousand was significantly worse than expected (- 100 thousand jobs). The US economy is undergoing the largest shock in modern history, which most likely will intensify in upcoming weeks.

Surprisingly, however, the US dollar started to appreciate in response to such weak US data, while the pound weakened on Friday. The reason for this is that the US dollar is considered a strong reserve currency in times of crisis, while the pound currently has rather bearish outlooks due to the uncertainty surrounding Brexit.