Brexit - Our take on the Withdrawal Agreement.

The 585-page draft Brexit Withdrawal Agreement caused a string of resignations throughout Theresa May's cabinet. This comprised of two senior ministers, including Brexit secretary Dominic Raab. However, what did the deal set out and what particularly did these resignees disagree with?

There will be a twenty-one-month transition period whereby current EU legislation and judicial oversight will stand. All new legislation from the European Parliament and the European Court of Justice will have to be followed by the UK however, without inclusion in any decision-making processes.

The estimated £39bn divorce bill was never confirmed in the draft. Often the topic of a financial settlement is a hard issue to fathom, however realistically a financial proposal was necessary in order to bring the EU negotiators to the table.

EU citizens in the UK and UK citizens in the EU, need to apply for permanent residency over the transition period. However, the nuisances indicate that UK citizens domiciled in one European country will not be able to change their residency or move across borders within Europe, without first applying to do so. UK citizens that take up residency in Europe over the transition period are permitted to apply for permanent residency after 5 years.

Terms of trade will not change over the transition period however, negotiations will continue. It looks as if there will be no tariffs on goods but some “quantitative restrictions” on services. If at the end of the negotiation period, the EU deems it necessary to have a hard border in Ireland to protect their interests, then the “backstop” will be activated. This will essentially trigger a trade relationship with the EU which is practically identical to the one the UK currently has and prevents the UK establishing trade agreements with non-EU countries

The UK will no longer have to conform to the Common Agricultural Policy. The extent in which UK farming law must be aligned is yet to be defined. In terms of security, the UK will still have many of the current measures in place. However, the extent of intelligence sharing will be scaled back and is still up for negotiation.

If the deal goes through parliament, (which is not certain) then sterling could rally. Conversely, if the proposed agreement is voted down, more uncertainty would prevail resulting in increased volatility. Furthermore, this could lead to a loss of confidence in the UK. Uncertainty and currency fluctuations would not benefit UK equities but could benefit UK government bonds (providing no downgrades to UK government debt). Bounce backs in UK equities from falls in the sterling are possible. Markets continue to await clarification and although the draft agreement defines common ground, there are still looming hurdles and expected volatility across asset classes.

For now, the draft agreement has created a platform for further negotiations. The Cabinet resignations indicated that some believed the draft agreement was the wrong starting point. Nevertheless, what all sides can agree on is that further clarity on the future UK/EU would be valued.

Alexandro Zaccarini
Investment Analyst


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