On Christmas Eve UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen announced that a Brexit trade deal (on goods) had been reached with days to go before the December 31 deadline. But as Lyxor Asset Management’s Global Head of Market Research Jeanne Asseraf-Bitton explains, the deal is unlikely to save the UK economy from the immediate ravages of Covid-19, but keeps the door open to further (much needed) negotiations.
Markets seemed relieved that the no-deal outcome was averted but reactions on UK assets including GBP were quite muted, a sign of lack of enthusiasm from investors on a deal mostly in-line with expectations.
The deal covers the tricky fishing subject with a 25% cut in the value of fish caught by EU boats, phased-in over the next five-and-a-half years (which is much less than hoped for by the EU). Regulatory alignment (the Level Playing Field) has been dealt with, but other issues are left unresolved.
The deal does not cover financial services access to the EU market, which will be determined separately, most likely by means of equivalence decisions. As a result, from January 1, 2021, UK financial services firms will lose their passporting rights. Regarding overall services, the deal does not include a mutual recognition of qualifications that will have to be settled by professional organizations, which will likely prove challenging.
Trade in goods will be tariff-free but material non-tariff barriers have appeared. The UK secured its right to regulatory autonomy. Companies will have to pay the regulatory cost for certification twice (UK and EU) for conformity to goods standards and possibly produce different goods for each market. However, businesses eligible for the new trusted trade scheme will face fewer controls at the border and some technical barriers for 'low risk' products could be lifted via self-declaration.
What impact will this have on the UK economy? Non-tariff barriers to trade, at a time when Covid-19 related restrictions have caused significant border delays, could shave up to 1% off UK activity. Overall UK real GDP is expected (Bloomberg consensus) to contract by 11% in 2021!
The deal lifts uncertainty, and keeps the door open to further (much needed) negotiations. Yet, Brexit will likely affect the UK economy, which has already been battered by the pandemic.
At this stage we do not recommend adding risk and prefer to keep a neutral stance on cheaply-valued UK assets. We closed our tactical long on GBP/USD a few days before the deal. Our stance on Gilts and Bunds remains at Neutral in light of short-term risks on activity heightened by the pandemics and the related policy restrictions.