Key Points

  • The risk of a “no deal” Brexit and the potential economic harm that accompanies it increased last week.

  • Uncertainty may continue until a potential last-minute compromise in mid-to-late October.

  • Avoiding a “no deal” Brexit could benefit U.K. financials and the pound.

The risk of a hard “no-deal” Brexit at the end of this year rose last week, weighing on U.K stocks and the British pound, and pushing U.K. monetary policy rate expectations into negative territory. But, as the Brexit battle moves to the endgame, there may be potential opportunity for investors.

UK equities lagging European peer

Total return measured by MSCI country indexes.
Source: Charles Schwab, Macrobond, MSCI data as of 9/11/2020.

What’s the latest?

The current flare up is fueled by U.K. legislation that would change key elements of the Brexit Withdrawal Agreement including subsidies and Northern Ireland trade that apply if a free trade deal is not reached. This is threatening to derail trade talks that must be finalized within a month. The complex issues at stake are illustrated by the diagram below.

Three scenarios