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The Brexit vote and UK markets one year on

Markets reached a swift judgment after the UK’s vote for Brexit. Within 24 hours of the vote, sterling had plunged almost 10 per cent to a three-decade low, share prices sank and gilt yields slid. Here is a look at how the last 12 months unfolded and what will shape the next year.

How has market reaction to Brexit affected the UK?
The pound climbed above $1.50 as the first votes were counted, but almost a year on it is 16 per cent lower at $1.27. Against the euro, it has dropped just over 14 per cent and is worth almost 88p against the single currency.

That sharp drop in the pound has helped UK exporters, but it has had a similar effect on the cost of imports. Excluding volatile parts of the trade balance, the UK had a deficit of £10.9bn in April 2017, virtually unchanged from the same month in 2016.

Sterling’s slide has also reverberated across the UK stock market. It has been especially beneficial to the blue-chip companies in the FTSE 100 that earn most of their revenues abroad. The blue-chip index is up about 18 per cent since the vote.

The FTSE 250, which is not the perfect barometer of the UK economy some claim, has risen more than 15 per cent since the vote.

Which factors have calmed markets over Brexit?
When Britain has delivered on its reputation for political stability it has helped sterling. The quick resolution of the Tory leadership contest of summer 2016 is an example, as was Theresa May’s outline of her 12-point Brexit strategy in a speech in January at Lancaster House.

Her decision to call a snap election in April buoyed sterling, as investors concluded Mrs May would win a signficant majority and create the space to negotiate Brexit without being hampered by time and backbench dissent.

Ironically, the pound took some comfort when the election delivered a hung parliament — a scenario some saw as more likely to produce a soft Brexit, which the market favours. Investors have also been more frequently calmed when UK economic data have shown surprising resilience.

What has spooked them since the vote?
Pretty much the opposite. Political uncertainty came with the resignation of David Cameron and Mrs May’s attacks on the City at the Tory party conference in October. The election result was negative for sterling, even if investors found some comfort in the soft Brexit scenarios that it threw up.

Hard Brexit scenarios now generate less of a market reaction than in the first months after the referendum. Mrs May’s Lancaster House speech, though it set out a broadly Hard Brexit strategy, was well received by investors because it ended weeks of uncertainty about Britain’s position.

While negative economic data have been broadly brushed aside, last week’s trilogy of rising inflation, weak wage growth and poor retail sales could not be. At the moment, “the market appears to be paying closer heed to UK fundamentals than the minutiae of Brexit”, according to Neil Mellor, a currency strategist at BNY Mellon.

The gilt market has been swiftest in latching on to signs of economic weakness, with the yield on the benchmark 10-year gilt dropping from a high for the year of 1.51 per cent in January to 1.03 per cent.

Where are markets heading as the talks begin?
The pound has been trading in fairly tight ranges since October, and analysts think that will continue. Other factors, such as the mixed US economic picture and increasingly strong eurozone data, will be just as important in determining the pound’s value. That, in turn, helps shape the fortunes of the FTSE 100.

Parliamentary politics could also be influential — markets will react badly if the UK needs another election in the near future. Data are likely to deteriorate, argues Antje Praefcke at Commerzbank, “and going into the Brexit negotiations . . . with an unstable political situation at home cannot exactly be a plus either”.

Such uncertainty has the potential to weigh on equities, says Yael Selfin at KPMG, whose UK index responded negatively to the election outcome while its non-UK index rose.

Where does this leave the markets and the BoE?
Mark Carney, the bank’s governor, could barely contain his dismay about Brexit this week, remarking how it would not be long before “we . . . all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption”.

Rising inflation, triggered by sterling’s weakness, has the BoE sufficiently worried for three members of the eight-person Monetary Policy Committee to vote for a rate rise this month. As a result, the pound moved higher, and did so again on Wednesday after Andrew Haldane, the BoE’s chief economist who has typically erred on the side of adding more stimulus, suggested that some of it be withdrawn in the second half of the year.

Analysts say the risk is that tighter monetary policy chokes off growth, and in cautioning that “now is not the time” for such action, Mr Carney is playing for time to see how the economy responds to what he called “the reality of Brexit negotiations”.

Jordan Rochester, a strategist at Nomura, says that “given that we would classify Andrew Haldane as one of the more dovish members of the MPC, it is hard not to expect market hopes of a hike to rise once again”.