Brexit deal unlikely to boost markets further, says Capital Economics
By Michele Maatouk
Date: Thursday 24 Dec 2020
(Sharecast News) - As the City and Britons in general awaited news on a Brexit deal, Capital Economics said in a note that a trade deal was unlikely to boost financial markets any further, with the UK still on course for a "relatively hard" Brexit.
Economist Paul Dales said that since markets have largely been expecting a deal for some weeks, there is limited scope for more Brexit-related gains in the coming days and weeks.
"Instead, it is the prospect of an eventual decent UK and global economic recovery from the Covid-19 crisis that explains why we think the pound will rise to $1.40 in 2021 and the FTSE 100 will climb to 7,500," he said.
Dales noted there's not much detail yet on what exactly has been agreed.
"It appears that a compromise has been reached on fisheries that involves the EU fishing quota in UK waters being cut by 25% over a five-and-a-half-year transition period with annual negotiations thereafter. And on the issue of the level playing field (i.e. fair competition), we suspect there will have been an agreement to not loosen regulatory standards from their current levels and to establish an arbitration panel to assess and resolve any future divergences.
"There's been no word yet on whether the EU has granted 'equivalence' for UK financial services, but since regulatory standards are the same right now, it would be odd if there's not a separate agreement on that."
More generally, the deal will cover a wide range of issues from transport to law enforcement. And it means no tariffs or quotas will be imposed on goods moving between the UK and the EU, maintaining the current situation.
Dales pointed out that compared to the other options the government could have chosen, this is still a relatively "hard" Brexit as the UK will leave the EU's Single Market and Customs Union.
"The latter means that custom checks and procedures will be required on goods moving between the UK and the EU from 1st January for the first time since 1973. This will add to the major disruptions and delays at the UK-EU borders already caused in recent days by the Covid-19 crisis," he said.
"But, notwithstanding any further Covid-19 border closures, with time UK firms will become familiar with the new customs procedures. And the deal means businesses can now plan knowing the shape of the UK/EU relationship (although we doubt there will be any release of 'pent-up' investment). Perhaps most importantly, the deal removes the risk of a 'no deal' Brexit and the resulting hit to households' real incomes from the inflationary effects of what would have surely been a sharp weakening in the pound."
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