Article 50: Don’t leave me this way – Westpac

Robert Rennie, Research Analyst at Westpac, suggests that given their base case, Friday’s vote was an earth shaking shock for them but post the Brexit plunge, markets have recovered some poise.

Key Quotes

“FX volatility is back to pre-Brexit levels, the FTSE100 is approaching 6m highs and GBP has been able to trade above 1.35 albeit briefly. Perhaps Boris Johnson was right: “the pound is stable, markets are stable”!

If only that were the case! £ plunged to 35 year low, the UK double notch downgraded and the FTSE banks sector is at March ‘09 lows. Given the lack of obvious Brexit trigger until Sep, uncertainty, political infighting and a hit to consumer/ business sentiment will characterise the NH summer.

As we run through end games, we see scenarios where Brexit may not happen. Article 50 raises mind boggling complexity in UK law as constitutional lawyers argue the “Prime Minister is unable to issue a declaration under Article 50 of the Lisbon Treaty without having been first authorised to do so by an Act of the UK Parliament”. Were such an act presented, it could be voted down and elections follow given that as of June 22, 479 MPs (out of 650) supported remain.

A materially weaker GBP will play a crucial role in rebalancing the economy and cushioning a likely recession. The BoE is more likely than not to cut rates and kick-start QE, probably Aug 4.

Political contagion risks run high in the year ahead in Europe too: Italy’s referendum on senate reforms is in Oct 2016; Dutch elections Mar 2017; French elections Apr-May 2017 and German elections Sep-Oct. EUR is a sell into 1.12 and likely trades lower into year’s end (sub-1.10).

AUD trades like a safe haven with iron ore, copper and crude all helping. That should end soon with the Federal Elections this weekend, RBA next week and a possible ratings warning later in July. We stick with the view that 0.7450/0.7500 caps. Finally, NZD lacks the negative triggers we see in AUD and 0.7150/0.7200 beckons.”