Here’s Where The Brexit Saga Stands Right Now

From Boris Schlossberg: Britain’s Supreme Court ruled on Tuesday that the government of Prime Minister May must seek Parliamentary approval before triggering Article 50. But the widely-anticipated ruling turned out to be a dud for the markets as the pound saw little reaction to the news.

The U.K. Supreme Court ruling revolved around two key points for the market. One was the Parliamentary approval issue, but given the 100-seat majority position of the Conservatives, the approval process appears to be a mere formality.

A few months ago, the Bremain faction held out hope that given a chance, members of Parliament would reverse the referendum vote and keep the U.K. in the European Union. Since that time however, populist feelings have only hardened. And with the election of President Trump, Brexiters take solace in the fact that the U.K won’t be left out in the cold as the U.S. will remain a potent economic ally.

Of more concern to those who wanted Brexit to proceed on schedule was the devolution issue, asking the Supreme Court to rule on whether Northern Ireland, Scotland and Wales all had to be consulted before PM May could proceed. On that issue, the Supreme Court ruled in the negative, essentially paving the way for the trigger of Article 50 by the March timeline.

Cable (British pound vs the U.S. dollar) initially sold off on the news, which in effect removed the last obstacle from the U.K.’s exit from the European Union. But then it quickly recovered to trade near the multi-week highs of 1.2500. At this point, the market appears to have made peace with the Brexit issue and investors have settled into a wait-and-see mode to determine the full impact of Brexit on Britain’s economy.

Although most experts predicted that the fallout would be severe, with some even forecasting a whopping 8% decline in GDP, the actual U.K. economic performance since the vote in June has surprised to the upside. In fact, the U.K. is the fastest-growing economy in the G-7 right now.

Of course, many analysts, including yours truly, have argued that given the massive devaluation in the pound and the membership in the EU, the UK economy is in effect currently enjoying the best of both worlds as it gets access to the single market but at very competitive costs.

Still, the extent of Brexit’s economic impact is not at all clear. Even a formal trigger of article 50 would take two years to complete, during which time the U.K. would still maintain ties to the EU.

In addition, the situation within the EU is further complicated by the upcoming elections in Netherlands, France and possibly Italy. In all those countries, the populist candidates are enjoying massive support and should the populist parties win, the Brexit vote would look prescient as it would confirm the EU is in danger of breaking up anyway.

Under that scenario, the U.K. approach to bilateral negotiations could prove to be better than the current single market model, which explains why cable is trading near multi-week highs despite every indication that Brexit will become a reality very soon.

On the ETF side of things, the iShares MSCI United Kingdom ETF (NYSE:EWU) was unchanged in premarket trading Wednesday. Year-to-date, the largest U.K.-focused ETF has gained 2.48%, versus a 1.82% rise in the benchmark S&P 500 index during the same period.

EWU currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #9 of 91 ETFs in the European Equities ETFs category.


This article is brought to you courtesy of Money And Markets.

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