UK and EU negotiations to enter the second stage - BBH

Sufficient progress will be judged to have been made, and so negotiations of the separation between the UK and EU will be allowed to enter the second stage, points out the research team at BBH.  

Key Quotes

“The formal decision will be made at next week's EU summit.  To be sure, "sufficient progress" is diplomatic-speak that any agreement has not really been reached, but suggests that the UK has made a few concessionary signals.”  

“The Irish border issue has not been resolved.  The UK committed itself to regulatory equivalence, which will mean different thing to different people.  When the UK leaves, a hard border is needed after a transition period.  The question remains where is the customs house and passport check?  The EU and Ireland say it cannot be between the Republic and Northern Ireland.  Many Brexiters and the DUP, which itself is a minority party in North Ireland, reject that it is between Northern Ireland and the rest of the UK.  Also, the Brexiters are not keen on any role for the European Court of Justice within the sovereign UK territory.”    

“The bottom line is that the second stage of negotiations may be just as trying as the first, and there is less time.  The EU negotiator Barnier wants the second stage to be concluded by next October.  A final agreement must be approved by several entities and it will take some time.”

“Sterling is trading firmly initially after running up smartly yesterday in anticipation of the agreement.  It posted an outside up day, trading on both sides of Wednesday’s range and closing above its high.  Follow-through buying was seen briefly, lifting sterling to $1.3520, where sellers emerged ahead of the week's high near $1.3540.   There are options struck at $1.3450 (GBP326 mln) and $1.3500 (GBP273 mln) that expire today and could be in play.”  

“UK interest rates were goosed higher by the news.  The foreign exchange market largely reacted yesterday to the prospects, but the UK debt market is responding today.  The two-year yield is up three basis points, which is the increase on the week, and the 10-year yield is up six basis points and is up three basis points on the week.”  

“The UK economic data were mixed.  Industrial output was flat as expected after a strong 0.7% gain in September.  Manufacturing output rose 0.1%.  However, the slump in construction (-1.7%) was considerably worse than expected (0.1).  The back-to-back decline is the largest in five years.  On the other hand, the UK reported a smaller trade deficit than expected and revisions to the September series that reduces the sting (GBP1.14 bln vs GBP2.75 bln).”