Snap AV: Brexit optimism/pessimism charted

Apparently “64% of respondents believe that the probability of an orderly Brexit negotiation is less than 50%”.

Digging into the details of the responses, we find that the majority of investors believed that the most likely outcome would involve a series of delays in the negotiations which may in turn weigh on market sentiment. Almost 70% of responses were taken before the UK election result, although comparing the results before and after we find that the responses were very similar…

Our economists look into the potential timeline and structure of talks between the EU and the UK. They categorise the potential outcomes into the following categories: an orderly Brexit, either a) ‘soft Brexit’, where the deviation from the status quo is limited and economic impact is contained, b) a ‘hard Brexit’, where the UK leaves the single market without establishing a strong partnership with the EU. A disorderly Brexit may occur if talks collapse; we believe the risks of this outcome are more likely either in the first months or at the end of the process. Alternatively, if the UK and EU fail to reach an agreement by April 2019, the EU27 can decide by unanimous vote of the council and with the approval of the UK to extend negotiations beyond the two years foreseen by Article 50…

Figure 5 illustrates expected asset returns over the next six months, given the level of uncertainty investors expect around the negotiations. UK assets are expected to underperform across the board, with the greatest degree of confidence (the highest proportion of votes) surrounding currency underperformance. This is in line with the results of our survey conducted prior to last year’s referendum. Investors expected Brexit risks to be expressed primarily through the currency, with limited spillover into European risk assets. Investors expected GBPUSD

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About David Keohane