UK: Staring the Brexit negotiations on the back foot – BBH

The failure of the Tory Party to retain its majority in the UK, regardless that a few dozen votes in the right areas could have changed the outcome, sets the UK wrong-footed to begin the Brexit negotiations, according to the analysts at BBH.

Key Quotes

“These negotiations need to be completed in a little less than two years, and the clock is ticking.”

“In the early days after the UK election, it is not clear what the message of the voters was. It is a Roarschock test of sorts; after all, the Tory candidates did receive a high number of overall votes. How much did the results signal second thoughts on Brexit, or discomfort with a hard Brexit?  Given the youth vote, was the promise of free tuition and forbearance on student loans a decisive factor?”

“Although there was a minor cabinet reshuffle, the ministers responsible for the negotiations have not changed. Brexit goes forward. May has been weakened. Her tenure is not clear. Perhaps sensing that the chalice is poisoned now, May’s rivals are at bay, with two joining the cabinet in the reshuffle. However, a cloud will hang over May until the party conference at the start of Q4. If she survives it, she may be seen as legitimate.”

“For May, the coming months will be about regrouping. They will be about reclaiming the initiative. She must convince her rivals and backbenchers that she is the right person at the right time. For investors, sterling may bear the brunt of the political uncertainty. In a weak sterling environment, the FTSE 100 fares better as a large part of the earnings are from abroad.”

“Inflation may peak in Q3 as sterling’s past depreciation and the runup in oil prices drop out of the year-over-year comparison. The risk to economic growth seems to be asymmetrically biased to the downside. One implication is that rates can be lower for longer.”