UK: Political drama to be most profound - BBH

Political drama may be most profound in the UK as two issues are likely to dominate:  the budget and Brexit, according to analysts at BBH.  

Key Quotes

“Chancellor of the Exchequer Hammond will make his budget statement on Wednesday.   Expectations are rightfully low.”

“The Chancellor had to quickly backtrack from his March initiative to raise the National Insurance contribution of some self-employed people.  He is likely to be particularly cautious this time.  His tenure may depend on it.  The revised forecasts of the Office of National Statistics do not give Hammond much room to maneuver even if he was so inclined.  Growth forecasts have been revised lower, and as a consequence, the projected deficit is larger than previously anticipated.”

“Brexit continues to be vexing.  For the past eight months, UK officials appear to have struggled to get their heads around the legal fact that once Article 50 was invoked, the power of the agenda and negotiations shifts to the EU.  The EU has clearly demanded that progress is made on three separate issues to move forward on the terms of the new relationship.  The three issues are the rights of EU citizens in the UK, the Irish border, and the UK's willingness to make good its past financial commitment to the EU.”  

“EU Council President Tusk gave the UK a two-week deadline to make progress.  Otherwise, he will not endorse the beginning of the next phase of negotiations at the December heads of state summit.  The pressure is on the UK to take action.”  

“Reports suggest a mini-cabinet meeting of key Brexit ministers on Monday may be a potential turning point and poses a risk for a spike in sterling volatility.  There are rumors that a significant cabinet shakeup also may be announced shortly.  Sterling has been in a roughly $1.30-$1.33 trading range for the past two months.  It has been confined to a range against the euro.  The euro has traded largely between GBP0.8750 and GBP0.9050.”

“Perhaps what Churchill once said about Americans (that they could be counted on to do the right thing, after the alternatives have been exhausted), might apply to the UK here.  Anything that suggests the UK and/or the EU is moving away from the brink may be seen as sterling positive.  We think an upside break should be respected.”