As the March 29 deadline for the UK to leave the EU came and went, there were still as many questions outstanding as when the country made the historic decision to separate from Europe way back in 2016. One of these questions which is still open to debate is the Brexit impact on trading. While pro-Brexit groups are keen to downplay the effects and so-called remainers are often accused of creating “Project Fear”, the answer may well lie somewhere in the middle.
Nevertheless, many of the major European banks are bracing themselves for the possible fallout of a no-deal Brexit, all in the context of a period which is proving to be difficult for them already. This is because stock trading with leading investment banks across Europe has been at historically low levels in the last quarter with the research company Coalition predicting stock and bond volumes could face a further fall of between 15 and 20% compared with the same period last year.
However, a report in The Economist has provided the slightly more comforting news that a no-deal Brexit could prove to be something of a shot in the arm for British Government Bonds. Traditionally a safer haven for investors’ money when times are tough, there’s reason to believe that these could rally both through increased demand plus the possibility of increased interest rates. Similarly, the stock market could benefit, in the short term at least. This is because over 70% of the earnings for companies in the FTSE 100 emanate from abroad and the expected fall in the sterling exchange rate could push up the earnings’ relative value. So, no doubt many European banks are anticipating that this could give their balance sheets a boost.
The possible instability of sterling in the event of a no-deal scenario could also offer opportunities for the currency dealings of European banks. The currency’s volatility was underlined in 2016 on the day after the referendum was announced when it dropped by almost 10% against the US dollar. Currently the pound stands at about $1.30 but most predictions see it falling to $1.20 if Britain crashes out.
Of course, investment and currency deals are only two of the forms of trading that will be affected. Perhaps even more significantly, imports and exports will too. The freedom to set up deals free from EU interference was one of the key benefits put forward by the Leave campaign and the UK government has been working hard to set these up with as many countries as possible.
Examples range from Fiji and New Guinea to Switzerland and Norway as well as with a collection of Caribbean Islands including Commonwealth countries Jamaica and Barbados. But even though great efforts have been made by the team led by Trade Secretary Liam Fox, it’s estimated that these currently only cover around a third of the UK’s current imports and exports. So with the prospect of the remaining two thirds of international trade coming under WTO rules in the event of a no-deal Brexit, it remains to be seen what this could mean in economic terms.
But one thing is for sure – it’s certain to lead to ramifications, the consequences of which we can only wait to see.
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