Market participants have long heard little about Brexit. Yet, currently, Brexit is back on the agenda in Europe. Many economists fear that the UK may choose a tough scenario, namely Brexit with no deal, as Prime Minister Boris Johnson once again refused to make any concessions on this issue.
The Brexit saga seems an infinite affair. No wonder, the global market is exhausted by the endless battles between the UK and the EU. Therefore, the upcoming problems have almost no influence on the movements in the stock market or in the pound sterling.
Recently, the UK authorities have announced that they will introduce a new law that could change the Brexit transition period.
Johnson issued an ultimatum to the euroblock saying the UK and Europe must agree on a post-Brexit trade deal by 15 October or Britain would walk away from the deal. "If we can’t agree by then, then I do not see that there will be a free-trade agreement between us, and we should both accept that and move on," Johnson pointed out. If the UK cuts ties with the bloc in the near future, it will nullify the transition period by setting a far earlier deadline for withdrawal. Johnson gave the European Union 38 days to strike a free-trade deal with Britain.
The pound sterling's reaction to this news was immediate. It sank against the euro by 0.6%, to 1.1138. At the same time, demand for UK government bonds advanced which led to a reduction in the yield curve. However, the global stock market did not respond to this news at all. Thus, all leading indexes were trading at the same levels. On the contrary, the FTSE 100 index increased by 1.5%, while the FTSE 250 index swelled 1.4%.
Currently, the global market, tired of the Brexit divorce saga, is more focused on the recovery of the global economy after the COVID-19 pandemic. The coronavirus-inflicted crisis hit the hardest the UK stock market: the FTSE index crashed by more than 20%. The pan-European STOXX 600-index shed 12%. Economists explain this price gap by the fact that the UK is not coping well with COVID-19. The British economy, which is highly dependent on the services sector, is more vulnerable to quarantine restrictions that were imposed to curb the infection spread.
However, some market watchers are quite concerned about the situation with Brexit, which is heating up day by day. London and Brussels are ready to resort to tough measures. The UK mainly relies on the inability of the European Union to make unpopular decisions with negative consequences. In response, EU representatives emphasize that the UK has not found yet a way to track customs cargo that does not pass through border checks. Moreover, the infrastructure required for such checks will not be ready by January 2021, when the Brexit transition period expires.
Analysts are also confused by the odd bargaining between Boris Johnson and the leaders of the European Union. New amendments to the Brexit agreement will enable Brussels to accuse London of manipulation. Presently, the UK stock market and the national currency have significantly devalued due to the risks associated with the country's no-deal exit from the EU. However, there is still hope that the parties will find a compromise.
