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UK: Saved by the global recovery - Nomura

The UK economy has, so far, failed to slow as sharply in response to Brexit as some were expecting immediately after the vote, explains the research team at Nomura.

Key Quotes

“Domestic demand – both consumer and investment spending – has slowed but not that sharply, while net exports have contributed most to the current annual pace of GDP growth. The ongoing global synchronised recovery has been an important driver of this, alongside weaker sterling and reduced import demand. With global growth aided by loose monetary policy and less fiscal tightening, net exports should continue to be an important offset to any further Brexit-related weakening in UK domestic demand yet to come.”

Rates/FX Strategy: Higher yields and GBP in the next two weeks

  • There are still potential obstacles to progress in the EU negotiations: Citizens rights and the Irish border are both unanswered questions. But given the exit bill required a lot of political will, we expect there is enough to see further capitulation from the UK on the other fronts. The reason that progress matters is because it opens up the idea of at least a two-year transition deal and pushes the ‘real’ Brexit day out beyond the markets natural horizon.
  • 10yr yields on both an outright basis and vs peers have risen sharply in the past couple of days. However, they are only pushing to around the top of recent ranges. Our belief is that yields can push above these ranges. We believe this because we think the positive Brexit news is a surprise to markets and thus positioning is not currently short. If we were to get better data and, indeed, a more hawkish BoE, then this could be an added kicker and GBP should rise with it.” 

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