As Brexit talks intensify, banks see sharply higher risk of no-deal exit


© Reuters. EU flag are placed on broken glass and British flag in this illustration picture taken

By Elizabeth Howcroft

LONDON (Reuters) – The chances of Britain leaving the European Union without a trade deal have risen dramatically in the last three months, according to major investment banks, most of which now see the probability of such an outcome at 50% or higher.

Britain left the EU in January but is currently in a status-quo transition period, which ends on December 31 irrespective of whether or not a deal is agreed. On Monday, the two sides started a decisive week of talks, with one diplomat noting an improvement in “mood music”.

But all six banks which participated in a Reuters poll in June are more pessimistic, with most citing UK legislation that would breach parts of the withdrawal agreement signed with the EU in January.

The move has drawn threats of legal action from the EU.

The most dramatic re-assessment was by Societe Generale (PA:), which said the bill “gravely damaged” trust. The probability of no-deal now stands at 80%, according to the bank, which had assigned a 17% chance in June.

Germany’s Commerzbank (DE:), meanwhile, puts the probability of no-deal at slightly below 50%, versus 10% in June, a scenario which strategist Thu Lan Nguyen warns could hit the pound hard, possibly resulting in depreciation of “something around 10%”.

The currency has fallen around 5% this month but with three months still to go before the transition period expires, options markets are pricing in more volatility ahead.

READ  Should you be investing money in pharma stocks?

ING now believes the risk of no deal is 50%, up from 40% three months ago. Only a small proportion of this risk premium is priced by sterling, according to economist James Smith, who sees the currency possibly heading towards parity versus the euro.

(Graphic: How likely is a no-deal Brexit? – https://graphics.reuters.com/BRITAIN-EU/bdwvkkldkvm/chart.png)

(Interactive version https://graphics.reuters.com/BRITAIN-EU/qzjpqnojavx/index.html of banks’ Brexit forecasts)

In a more detailed forecast, Standard Chartered (LON:) stuck with a one-in-two chance of an agreement by the end of the year but also saw a 20% chance of the transition period being extended and a 30% chance of exiting without a deal.

JPMorgan (NYSE:), not included in the Reuters poll, expects the worst-case outcome to wipe at least three percentage points off UK gross domestic product in 2021.

It puts the risk of no-deal at one-in-three but told clients that “with brinkmanship part of the process it may appear higher than that before agreement is reached”.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

READ  Australia's ASX200 stock market nudges all-time high as bad news means good news for investors





READ SOURCE

LEAVE A REPLY

Please enter your comment!
Please enter your name here