Good morning,
May set to signal willingness to exit single market
Tomorrow, PM Theresa May is set to outline her Brexit negotiation priorities in her most revealing speech yet. Weekend press reports cite members of her staff as saying the Government’s official line will be a willingness to leave both the Single Market and the Customs Union unless significant concessions are made by Brussels in order to hand over power of immigration controls and repeal freedom of movement laws. Given that freedom of labour is one of the basic and founding tenets of the Single Market, it’s highly unlikely the EU will be willing to roll back portions of its rules so that the UK can still sell goods and services tariff-free.
While this option has always been on the cards, the market movements today are a reflection of acceptance that the UK is now more likely than not to have a very loose (if any) relationship with its single biggest international customer.
Sterling on the ropes at the European open
The pound’s fallen to, again, levels not seen since the mid-1980’s against the US dollar and nine week lows against the euro. May’s speech is now unlikely to prove particularly market-moving given the press reports this weekend, and the pound’s value will now be a result of the market’s assessment of the strength of the UK’s arguments once negotiations have begun. Philip Hammond, the UK chancellor, had been reluctant to outline the UK’s largest bargaining chips but it now appears likely the government will use the rate of corporation tax as its most influential tool when talks begin. The basic message is now likely to be “give us a good deal or we’ll slash corporation tax and steal your business”. The effectiveness of this strategy remains to be seen, but it at least appears that a Brexit plan is finally being put into place.
Trump’s hesitance is China’s opportunity
This week’s World Economic Forum in Davos, a get together of the world’s most influential politicians, business leaders and central bankers, has been shunned by Trump himself, who’s busy organising his inauguration ceremony this Friday. It will, however, be the first time in history a Chinese president has visited the conference. It would have been difficult to predict five years ago that in 2017 the world would have been looking to China for a sense of stability and a soothing message, but that appears to be the case. World leaders will be watching Xi Jinping’s speech to gauge whether China will be asserting itself this year through engaging in trade wars and Twitter barbs with the US, or by repositioning the country as a co-operative, global, 21st century powerhouse.
The day ahead
The calendar is particularly light today, but picks up later in the week, with UK and US inflation numbers, the ECB rate decision on Thursday and a few central bank speakers throughout.