Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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UK: Brexit certainty (temporarily) lifts sentiment
Christopher Dembik
Head of Macroeconomic Research
Summary: Saxo's latest Brexit overview: improving market sentiment, Boris boom and limited risk of no-deal Brexit.
Tomorrow, I will be in Brussels to discuss with the EESC Brexit follow-up group Saxo’s macro outlook for the UK.
My Brexit base case scenario:
- No-deal Brexit at the end of 2020 is unlikely.
- Trade agreement: Phase 1, Phase 2 etc…for the next 5/10 years
- High risk zone: June/July 2020
- « Boris boom » is coming: Fiscal stimulus (March 11 budget) + rate cut by the BoE (March)
- Negative spillovers to the EU are limited (positive sentiment, CB support, solid underlying fundamentals)
Here’s what we know for the banking and financial industry:
Limited staff relocation in absence of hard Brexit. Paris (front office activities), Poland and Ireland (back office activities), Frankfurt (administrative departments) and Luxembourg (funds).
In terms of jobs, the figure officially mentioned for France is 1,500 job transfers to Paris, but it is likely to be lower.
The ECB regulator is putting pressure on banks so that commercial and market activities for continental Europe are no longer processed from London. Ultimately, it is likely that London will remain the financial hub for UK and global (outside Continental Europe) financial operations.
Clearing houses are the most important sovereignty issue that has not yet been resolved. As of today, London is the main euro clearing market. In the context of Brexit, the ECB wishes to relocate these activities to Continental Europe.
In the interim, the ECB has granted a one-year extension until the end of January 2021 during which it recognizes UK-based clearing houses as “legitimate”, which should help find common ground. Ultimately, the most likely scenario is that UK-based clearing houses will be subject to “dual regulation”, both from the UK regulator and the ECB.
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