Banking on Brexit

 

 

Like, loath or simply view as a necessary evil, the banking sector in the UK is dominating political thinking currently and will form a big part of Brexit negotiations with the EU.

 

I appreciate that I have been far from charitable or diplomatic since 2008 with my opinion or comments on the banking sector. However, putting that to one side (just for once), it is important that we discount my opinion and understand the political position with Brexit and the banking sector.

 

The Brexit Issue……

One of the ‘perks’ of Europe's Single Market is ‘passporting’. Passporting allows banks and insurance companies to sell their services anywhere in the single market (i.e. across all EU member states) without having to establish a base in every country in Europe.

 

But single market membership comes with conditions: freedom of movement of goods, services, capital and (crucially) people. Or to put that another way……quit the single market and the UK will lose passporting rights.

 

The UK Economy Issue……

In short, large banks are getting ready to relocate out of the UK (by as early as next year) over fears of losing passporting rights. Summed up perfectly by Anthony Browne (the head of the British Bankers Association)…..“public and political debate at the moment is taking banking in the wrong direction."

 

Essentially, banks with European headquarters in the UK that enjoy freedom of trade with all EU states would need to set up a secondary location in the EU to trade with EU countries. Is it any wonder that the EU will be very reluctant to accommodate the UK wanting to retain passporting when Paris, Frankfurt, Rome, Madrid, et al are all rubbing their hands at the prospect of some of London’s financial market moving to the EU.   

 

The Political Issue……

Theresa May has already said she intends to restrict the free movement of people from the EU after Brexit, while EU leaders have meanwhile said the four freedoms are indivisible and non-negotiable. A Brexit with selective retaining / removing EU rules is where the negotiations will be key.

 

Given the financial importance of the banking sector to the UK economy, Theresa May is really caught in a tough place. If Brexit really does mean Brexit, then the consequences could be huge without key negotiations.

 

Banking is the UK's biggest export industry by far……a key thing to consider when we view the political sparing over the next 6 months.

 

Interesting times.

Marmitegate

 

 

There has been quite a squabble brewing for the last few weeks between supermarkets and suppliers, which is set to be a continued theme going forwards as inflation is likely to be a big deal over the next 18 – 24 months.

 

The Background Bit……

Unilever has had a hissy fit regarding the price it currently supplies its products to Tesco. Unilever wanted to raise its prices by about 10% to compensate for the steep drop in the value of Sterling. Tesco refused the price increase and halted online sales of top-selling goods produced by Unilever such as Persil, Ben & Jerry's ice cream and Marmite.

 

At the eleventh hour, both sides came to an undisclosed agreement leading to Tesco announcing no price increases and "We always put our customers first and we're pleased this situation has been resolved to our satisfaction." How very noble.

 

The Bigger Issue……

The value of Sterling against the Dollar is now 18% lower than June, on the back of the EU Referendum result. The significant drop in the exchange rate of sterling is reflection of how little confidence the world has in the UK currently due to the uncertainty of Brexit.

 

This 18% reduction now means that anything the UK imports is 18% higher to buy as all commodities / raw materials are purchased in Dollars. The Dollar is the default currency that everything is bought in from overseas. Whether that be tea from India, coffee from Brazil, oil from the Middle East, etc. Clearly an 18% increase in the cost of buying commodities / raw materials has to be absorbed by someone.

 

So who absorbs the increase in cost?

 

Option A

The maker / supplier of the product (in this case Unilever) keeps the sale price to the supermarket the same but accepts the increase in cost and lower profit margins as a consequence.

 

Option B

The supermarket accepts a higher price to buy from the maker / supplier (in this case Tesco) but keeps the sale price to the customer the same and simply makes less profit.

 

Option C

The maker / supplier increases their price to the supermarket and the supermarket increases the price to customers (who in turn pay more).

 

In the short term, Tesco and Unilever came to a deal so that Option C was avoided and we will not see any price increases as customers. But here is the key question……for how long will this last before the customer is hit?

 

The Bank of England is anticipating inflation to hit 3 – 4% over the next 18 months as a direct consequence of a weaker Pound against the Dollar and the increase in cost to make and supply goods. Clearly this is not good for the UK generally as wages will not increase at the same level as inflation. The UK economy will grind to a halt as a consequence.

 

Which leads me back to my point from a few months ago about how politicians failed us prior to the EU Referendum in that clear information on the consequence of ‘remaining’ and ‘leaving’ were never spelt out. All we got was spin, counter-spin and then a bit more spin for good measure.

 

If we knew then what we know now, would we have the same EU Referendum result?

 

Interesting yet avoidable times.    

Deutsche Oxymoron

 

 

 

Deutsche Bank has been a big deal in world banking for many a decade. At one point, it was the sixth biggest bank in the world and as respected in Manhattan as it was in Munich. In 2008 when the financial crisis led European stalwarts such as UBS and Credit Suisse to seek bailouts, Deutsche weathered the storm on its own.

 

But unlike those banks that downsized in the wake of the global crash, Deutsche Bank arrogantly continued regardless. Germans accused of arrogance......who’d have thought it!

 

Instead, Deutsche Bank is now paying the price for its army of Investment Bankers that are employed across more than 70 countries that took risks that it could not support. As a result, Deutsche Bank is under the most pressure a major lender has faced since the 2008 financial crisis.

 

So, what’s caused it?

 

Deutsche Bank has been under intense pressure since US authorities said last month that they were to fine the bank $14 billion to settle an investigation (mis-selling mortgage backed securities, manipulating Libor rates and fixing gold prices). After a recent share price slide, Deutsche Bank isn’t worth much more than the fine.

 

The current situation was perfectly summarised by the International Monitory Fund when it described Deutsche Bank as “the world's most dangerous bank“.

 

Rather alarmingly it also declared......"If Deutsche Bank goes down, everyone else has a problem too".

 

Clearly this is far from the German efficiency model we have come to expect with German business……let’s hope that the German Government can negotiate more efficiently and reduce the size of the fine.

 

Banking crises is soooooo last year…..or is it! 

Political & Economic Waymark

 

 

We’ve waited long enough for it but finally we have a waymark on the Government’s thoughts on the exiting of the EU and the UK economy in general. Monday was a big day politically and economically……not only did Theresa May show her EU hand but the Forgotten Man (Chancellor Philip Hammond) actually spoke in public and gave an actual opinion. Ground breaking stuff for this Government.

 

Theresa May……

The big news from the Prime Minister was that the UK will begin the formal Brexit negotiation process by the end of March 2017. The timing on triggering Article 50 of the Lisbon Treaty (and giving 2 years notice to leave as a consequence) means the UK looks set to leave the EU by summer 2019.

 

Theresa May said that “voters had given their verdict with emphatic clarity and ministers had to get on with the job.” I’m never one to split hairs (actually, on second thoughts), but the EU Referendum results were 51.9% ‘leave’ and 48.1% ‘remain’……I’m not really too sure that such a narrow win / decision can be classed as “emphatic clarity”. In fact, it couldn’t be further away from “emphatic clarity” and  was closer to a vote recount!  

 

What was emphatically clear was her chest thumping statement that “we are going to be a fully independent, sovereign country - a country that is no longer part of a political union with supranational institutions that can override national parliaments and courts.” I have no doubts that she will deliver Brexit……her legacy will be written for her based on how orderly we leave.

 

Forgotten Man……

Chancellor Philip Hammond said he will prioritise spending on new homes and transport rather than following his predecessor George Osborne's aim to balance the books by 2020. He said his predecessor's deficit reduction policies "were the right ones for that time but that times had changed since the vote to leave the EU”.

 

Which all begs the question……what was the point of years of austerity, job cuts, cuts in public spending, etc. if a change in cabinet (not change in political party) rips up all that has gone before? Regardless, the Forgotten Man will spend more and cut less as he is concerned that Brexit “may cause turbulence and business confidence would be on a bit of a rollercoaster".

 

Rightly or wrongly, agree or disagree, the direction of travel seems far clearer now.

 

For me, the Prime Minister and Chancellor spilling the political beans on Monday was a Ferrero Rocher moment…… ambassador you are spoiling us.