Deal or no deal

This coming week is a very big week for sterling investors with the Chancellor also presenting a new statement on fiscal policy. Read Karen’s latest briefing on next week’s key events

Go to the profile of Karen Ward
Mar 08, 2019

The coming week is a very big week for sterling investors since the Chancellor will present a new statement on fiscal policy and there are a series of votes in the House of Commons to break the Brexit impasse. Whilst Brexit negotiations have dominated UK headlines, there has been a marked improvement in the UK’s public finances. Public borrowing is now a fraction of what it was just a few years ago. Government debt – as a percent of GDP - is finally on a downward trajectory. This is likely to be the main theme of the Spring Statement when released on Wednesday.

The Chancellor seems highly unlikely to spend the windfall immediately, largely because by the time the Chancellor stands up to present the fiscal statement the projections will already be out of date. The evening before the House of Commons will have voted for a second time on whether to accept the Brexit deal the Prime Minister has negotiated.

If the deal is passed the Chancellor’s revenue windfall could get even bigger. The uncertainty caused by Brexit has coincided with a slowdown in spending, investment and the housing market in recent months – all of which generate tax revenue. A vote in favour of the deal should lead to some revival in activity as the UK will smoothly enter a period of transition and negotiations on the final partnership can proceed. The Chancellor could then fuel this uptick in activity by loosening fiscal policy in the Autumn – the ‘deal dividend’ as he has termed it.

In this scenario we would be likely see some pick up in the valuation of small and mid-cap domestically-focused stocks. It might not be such good news for the large cap international stocks because a modest uplift in sterling could depress overseas earnings. It may also not be good news for gilt prices since an acceleration in activity at a time when record high employment suggests the UK is already at full capacity, might encourage the Bank of England to raise interest rates, which in turn would push down gilt prices.

It is possible that the deal does not pass on Tuesday night. Having rejected the deal Parliament will then vote on whether it will accept ‘no deal’ on Wednesday evening. Given votes on former amendments we can be reasonably confident ‘no deal’ will be firmly rejected. In which case, there will be another vote on Thursday asking Parliament whether it wishes to extend Article 50 for a short-period for discussion to proceed. In this scenario, markets are likely to end the week broadly where they start since the state of play would be similar to where we are today. One in which no deal is not acceptable to either side, but the game of brinkmanship looks set to continue until one side bends to a further concession.

Karen Ward is the Chief Market Strategist for EMEA at J.P. Morgan Asset Management. Read more about our Market Insights programme>


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Go to the profile of Karen Ward

Karen Ward

Chief Strategist for EMEA, J.P. Morgan Asset Management

Karen Ward, Managing Director, is the Chief Strategist for EMEA for J.P. Morgan Asset Management. She delivers insight into the economy and financial markets to thousands of professional investors across the UK, Europe and globally. Karen has considerable experience in both public policymaking and economic and financial analysis. She started her career at the Bank of England providing supporting analysis for the Monetary Policy Committee. She joined HSBC Global Banking and Markets in 2006 as Chief UK Economist. She was promoted to Senior Global Economist where her work included The World in 2050 - an analysis of the structural changes affecting the global economy and the rise of the emerging economies. Karen was appointed Chief European Economist in 2014. In 2016 she was appointed Chair of the Council of Economic Advisers for the Chancellor of the Exchequer. In this role she advised the Chancellor on macroeconomic issues including fiscal strategy and Brexit. Karen has a Masters with Distinction in Economics from University College London.

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