How Markets May React to a Brexit Deal

After a difficult few weeks, the news on Brexit has moved quickly; an agreement has now been reached on the draft text of the separation agreement. A likely Brexit deal has near-term and longer-term implications for markets: We expect volatility as the process moves forward, along with a potential rise in UK sovereign yields and strengthening of the pound, though some Brexit-related risk premium is likely to remain.

The draft Brexit agreement addresses an interim solution to the Irish border if the final trade deal is not settled by December 2020. The solution of a UK/EU customs arrangement resolves the issue of how to prevent a so-called hard border being created between Northern Ireland and the Republic of Ireland. However, it also raises new issues of whether the UK has any control over the regulatory standards within that customs arrangement, and how the UK might eventually leave it.

Already there has been commentary from a variety of MPs on this very issue, and therein lies the challenge for Theresa May’s government: how to tread the difficult path of placating the various constituents of the Conservative Party and their partners in Northern Ireland’s Democratic Unionist Party (DUP), many of whom have differing views of the Brexit they want to see.

Now that the first hurdle of the UK Cabinet meeting is completed, the focus moves on to the degree of backlash from Conservative and DUP MPs, as well as the reception the deal receives across Europe. There will no doubt be many more headlines, and lots of uncertainty remains. However, we believe that both sides ultimately want to come to an agreement, albeit for different reasons.