After months of brinksmanship and the posturing that goes with it, Britain and the European Union seem to be getting serious about concluding a last-minute post-Brexit trade deal. Negotiators have postponed their mostly unilateral deadlines repeatedly. Indeed, the Dec. 31 end of the Brexit transition period was probably the only deadline that ever counted.
European government bond yields came off last week’s lows Monday as weekend talks of a renewed effort to “go the extra mile” buoyed hopes that a deal could be reached after all.
Efforts To 'Go The Extra Mile,' But Markets Wary Of Negative Risks
Michel Barnier, the EU’s chief negotiator, was suggesting that a deal could be done even this week, or it if came too late for European Parliament ratification this year, the parties could agree to a provisional deal pending a vote in early 2021.
UK gilt yields were up 2 to 5 basis points on Monday, and bond yields of top EU member countries showed a similar rise as optimism about an accord encouraged investors to move tentatively out of the safe haven of bonds. (Bond yields move inversely to prices.)
Yields on the benchmark 10-year gilts rose more than 5 bps at one point, to 0.24%. One analyst forecast the yield could shoot up to 0.45% and beyond if an agreement is reached.
Germany’s 10-year bund, less sensitive to Brexit politics, edged up more than 1.5 bps to about minus 0.62%.
Ireland, more directly affected by Brexit, saw its 10-year yield rise more than 3 bps from a record low last week to above minus 0.31%.
At the other end of the yield spectrum, Italy’s 10-year bond yield spiked above 0.53% from below 0.50% last week before retreating below 0.51% in later trading.
Barnier was happy with the concession by British Prime Minister Boris Johnson to accept a so-called “evolution clause” that allows for unilateral retaliation on tariffs if standards diverge significantly. On the other hand, the former French foreign minister felt that talks on fisheries had regressed as Johnson apparently expected a concession in return.
The trade deal does not include the financial sector, which of course is of paramount importance to the UK as London is Europe’s only global financial center.
The EU has been cagey about granting equivalence—accepting UK financial regulation as more or less equal to EU rules—though it has readily granted this status to the United States, Canada, Japan, and other major trading partners with forums to discuss possible legislative changes that would mean withdrawal of equivalence.
The pound sterling gained ground on both the U.S. dollar and the GBP/EUR amid the optimism. Markets were tentative and investors generally wary of the negative risks. Both the EU and the UK shaded their optimistic comments with caveats.
What’s been clear from the outset is that both sides would benefit from as little disruption as possible in relations. EU investors would have much to lose if they don’t have access to the liquidity of London’s markets.
The depth and breadth of markets in the City has been built up over centuries and continental centers would need decades to catch up. Trade, too, is very much a two-way street. It all functioned well before the UK joined the bloc, and it will function well after the UK leaves. Politicians just need to catch up to that reality.