Jitters over the supposedly “watertight” deal struck between the EU and UK last week over the next phase of the Brexit talks weighed on sterling and UK gilt yields yesterday, showing that securing a final agreement is still far from certain, analysts said, writes Eamon Quinn.
Sterling fell at one stage by 0.5% against the euro, to 88.3p and UK bonds gained on safe-haven buying — which drove British 10-year yields eight basis points lower to 1.2% — as cracks began to show in the Brexit compromise agreed upon between UK prime minister Theresa May’s government and the EU.
EU envoys made clear that the bloc will halt the next phase of talks if the UK tries to unpick the deal agreed last week.
UK ministers including Brexit secretary David Davis had sent signals over the weekend that the UK wasn’t really committed to what it signed up to, although he has since distanced himself from the comment.
The mixed political messages has added to the uncertainty over the second stage of the Brexit talks, said Alan McQuaid, chief economist at Merrion, predicting the renewed political jitters would rule out any rally for sterling for the time being.
“There is a feeling that the can has been kicked down the road. The impasse is still there and sterling will be volatile in the meantime,” Mr McQuaid said.
Philip O’Sullivan, chief economist at Investec Ireland, said the effect on financial markets from the renewed highly charged political comments was a reminder that there were “many twists and turns” to come in the Brexit talks.
“It is clear that there is plenty of confusion still around Brexit,” said Jason Simpson, a strategist at Societe Generale in London.
“We may be moving to phase two, but criticism that the deal was far from watertight and that things may still fall apart has probably provided a little support,” he said.
Political differences of opinion on Brexit talks could compromise the ability to move the talks on to trade, which would likely benefit gilts as a haven, said John Wraith, the London-based head of UK rates strategy at UBS. Mr Davis had said on Sunday that the deal agreed with the EU on Friday “was much more a statement of intent than it was a legally enforceable thing”.
However, he said yesterday that the deal was “legally enforceable under the withdrawal agreement”.
Meanwhile, credit card company Visa said squeezed British consumers reined in Christmas travel plans and bought fewer new cars last month, setting the stage for the first fall in festive spending in five years.
The downbeat message came alongside a cut by the British Chambers of Commerce to its UK economic outlook for the next two years as the business organisation sees inflation rising faster than pay for the next two years.
Visa said inflation- adjusted consumer spending last month was 0.9% lower than in 2016. This was a smaller fall than October’s 2.1% drop but still enough to make annual falls in spending likely for the first time since 2012 for both the Christmas season and 2017 overall, the company said.
The biggest falls in spending came on expensive items such as cars and Christmas trips abroad, while cheaper luxuries such as beauty treatments and cosmetics saw gains.