Markets Now Bored

Markets shrugged off news of a six-month delay to the UK’s deadline to depart from the European Union, with markets now “bored of the constant drama” associated with Brexit, although asset managers warn the country’s economy will continue to suffer as the process is dragged out.

The UK has been set a 31 October deadline for its departure from the EU, after talks in Brussels on 10 April left the country on course to take part in May’s European elections or risk leaving with no deal on 1 June.

Brexit can happen earlier than either date if Parliament is able to ratify the withdrawal agreement, which has already been heavily defeated three times.

The FTSE 100 was down by just over 0.1% and the FTSE 250 was up by 0.5% at the end of the day following the agreement (11 April). Meanwhile sterling was flat against the dollar and the euro, as it moved up 0.4% against the Japanese yen.

Head of flexible bonds at Vontobel Asset Management Ludovic Colin said the limp reaction reflected the fact that “markets are bored of the constant drama and the fact that Brexit keeps getting pushed back via successive extensions”.

He added: “The price of insurance against a bad scenario has collapsed, meaning markets do not feel the need to protect themselves against an impending storm.

“The market has worried a lot on a hard Brexit, and now that solution has been removed in the short term, the sector may now focus its attention on other immediate risks.

However, Colin also warned that “the cost to the UK economy will continue [and] for businesses, this added period of uncertainty is very negative”, while “the direct impact on the UK economy and the fact the global environment is deteriorating will probably make investors very cautious about investing in UK assets over the coming months”.

Colin added that while predicting which assets are set to be most impacted over the coming months was “too hard”, an “even more aggressive political game in Westminster” will weigh on sterling and UK assets compared to the rest of the world”.

Schroders senior European economist and strategist Azad Zangana said the impact of the “ongoing uncertainty” could result in the Bank of England (BoE) keeping interest rates on hold until “November or beyond”.

Zangana explained: “The BoE has been keen to raise interest rates to more normal levels, only to be held back by Brexit-related downside risks to the economy. 

“There is now a possibility that, with a longer delay, the BoE decides to hike in May, but it is more likely to wait until after Brexit has been settled.

“This suggests that our forecast of a rise in August will now need to be pushed back further, potentially to November, or even later given our view of the possibility of yet another extension beyond October.”

UK economist at UBS Global Wealth Management Dean Turner said “sluggish economic growth is likely to continue until the [political] impasse is broken”, adding that removing the initial 12 April Brexit deadline “will be welcomed by the markets but any excitement is likely to be short-lived”.