The market after Brexit: tough divorce in European way

The future of Great Britain depends on exit conditions from the EU

The first week after Brexit has ended with a victory of «bulls» - practically all assets are traded higher than prices before referendum and demand for risk papers remains high. As key event of last week may be considered a confirmation of correction of monetary policy of Britain, the main event of future - NFP, which negative data can put the end to plans of toughening of FRS`s policy.

Despite more than 4 million voices for the petition about cancellation of results of the English referendum, activity of protests and attempt of two British parliamentarians to push the project of the second referendum, unprecedented for the United Kingdom, there are practically no chances of return to former history.

The former political favorites of Britain line up run from responsibility. The new prime minister can be elected in September and though Cameron has refused a repeated referendum, in a year the situation can change and quite perhaps new vote. The only logical exit - a victory in new parliament of supporters of the EU under the slogan of cancellation of a referendum - only in such way everything will look legally. But Europe will not miss chance of illustrative punishment for political separatism and already prepares intimidation methods for other EU countries. There will not be review of the decision on an exit from the EU.

As for now, if Great Britain leaves the conditions which are considered as strictly fixed are:

  • any partial options (that is Scotland and other satellites too);
  • preserving access to the single market, requires accomplishment of all basic rules of the EU (freedom of goods, services, the equity and movement).

The future of Great Britain depends on exit conditions from the EU, but it`s impossible to keep former line items and privileges in European single market. From problems of migrants not to leave - if London refuses to observe the migratory principles of the EU, then there will not be access to the single market. France, which constrains a flow of refugees for a several months in Calais, is ready to open border and to create additional problems to British. Freedom of movement is necessary not only for business, but also for regular citizens, and therefore British have queued for the European passports - in a priority Cyprus, France, Germany.

We will remind, negotiations of the EU and Canada on the new trade agreement continued more than 6 years, and with London, according to the European Commissioner for trade Cecilia Malmström, detailed settlement can drag on for bigger term. In this case it is not necessary to expect advantageous conditions, the entire period of long-term negotiations Britain will be behind perimeter of the single market and it will become a constant factor of pressure upon pound.

There will not be any official negotiations till request on an exit from the EU, but so far nobody prepares documents on an exit of Britain from the EU. The issue of loss by the British banks financial accreditation of the EU is almost resolved. Transfer of the center of carrying out clearing transactions in euro from the London City to the platform in the Eurozone, and also toughening of the budget rules of the EU prepares.

Market reference points of Bank of England are determined by Carney's performance: basic assessment of the situation is planned at the forthcoming meeting (on July 14), active operations of the regulator - not earlier than August, after the British quarterly inflation statement. Additional stimulation in the form of interest rate reduction, extension of the APF program and cancellation of the increase of the anti-cyclic buffer of the equity to 0.5% of the amount of assets, accepted in March of this year, is expected.

In turn the ECB prepares for considerable expansion euro-QE. Draghi declared that because of Brexit the ECB is not ready to execute the program in planned amount, and therefore is already ready to buy more risk bonds. As a result bonds of the peripheral countries of Europe sharply start to growth - because of this partly it is possible to explain growth of euro last week - large players have decided to play on growth of these debt securities.

From other news it should be noted:

  1. Moody's and Fitch, after S&P, have more strictly lowered a credit rating of Great Britain - from "AAA" to "AA". S&P has risked to support moods of investors and to punish the European Union - on rating downgrade of the EU the euro together with dollar has lost more than 90 points, but quickly enough has recovered.
  2. Deutsche Bank, one of two banks which have not passed FRS`s stress tests on a case of possible financial crisis is recognized by the IMF as a source of substantial risk for the region. But in the conditions of buying up of ECB of Eurobonds without the highest rating, the regulator can just purchase the bonds emitted by systemically important German bank and to close a hole in its balance.
  3. The abnormal stock market baffles analysts, and speculators. The probability that FRS will raise a rate at one of the next meetings is almost equal to zero, as a result demand for dollar assets grows - on S&P500 the mark 2100 is reached again, and in 3 last days general growth was more than 5%.

The Independence Day in the USA on Monday, therefore weekly auctions on bills of exchange are shifted on Tuesday and Wednesday. Technically it would be time already for dollar to begin to fall, but, on the one hand, presses a negative from Brexit, and on the other hand, large players obviously bought up euro in recent days before vote and now actively dump line items. The forthcoming solution of RBA - the statement of China for devaluation of yuan, Brexit, lack of toughening of policy from FRS and the speculative growth of AUD can provoke interest rate reduction. The market does not lose speculativeness, it`s worth being careful.

USD/JPY: Basic resistance: 103.36-104.33-105.10(strong)-105.95-107.12. Supports: 102.30-101.40-101.05(strong)-100.50. Recovery requires steady movement above the range 104.50-105.00. You should not wait for serious steps from BOJ till July 10 (elections to high chamber of parliament), but breakdown of a mark 100 is dangerous by aggressive movement at least till 98.50 and sudden intervention.

EUR/USD: The actual range intraday 1.1220-1.1080. The zone 1.1200 is strictly controlled by market-makers, trade strengthens risks of movement to 1.1500 above. Basic resistance: 1.1180-1.1200(strong)-1.1270-1.1350; supports: 1.1111-1.1080(strong)-1.1010-1.0985-1.0800(medium-term protection).

Author: Lachlan Patel,
ForexChief Currency strategist