This Friday Prime Minister Theresa May will deliver a Brexit speech at the annual Pontignano Conference near Florence, Italy. It seems that Tuscany was the best platform for what will be May’s third update on Brexit plans (after the Lancaster House speech in January and the letter triggering Article 50 back in March), avoiding France and Germany where focus this weekend will instead be on the major labour reform demonstrations and federal elections respectively.
On the day of her speech it will have been 15 months since the Brexit vote and a week shy of 6 months since Article 50 was triggered, and yet most are still expecting the speech to be light on details and Brexit ideology. After all how can one detail progress that has yet to be made? And if, a quarter of the way into the leaving process, there is still little to be announced or even signs of relinquishment then markets may take this as a negative.
May is expected to offer in the region of €20bn to settle the so called ‘divorce bill’. If such a concession is accepted this could break the 3-month impasse and allow negotiations to advance, offering some optimism that next week’s (delayed) fourth round of formal Brexit negotiations in Brussels will finally include meaningful discussion on future trading relationships. One wonders whether Foreign Secretary Boris’ latest 4,000 word rant have been crafted to give the actual Government’s proposals a greater semblance of compromise. The proposed financial settlement figure should be enough to cover associated project costs that the UK has previously signed-off on but not all spending promises that the UK has made.
Meanwhile sterling remains near its highs since the Brexit vote (versus the dollar) and may be vulnerable to some retracement if the Florentine speech lacks the proper ingredients. Also, the UK saw mixed August economic data as retail sales beat expectations in the face of inflation (the ONS stated that non-food prices increased at their fastest in 25 years) whilst the Federation of Small Businesses published that their small business confidence index plummeted from 15 in the second quarter of this year to just 1 in the third. FSB chairman Mike Cherry attributed the fall in confidence to ‘rising inflationary pressure and a weakening domestic economy’.
Later this evening we have the release of the FOMC statement and Janet Yellen’s accompanying press conference - likely to include further discussion on reducing the Fed’s $4.5tn balance sheet, which if announced later will offer further confidence in the recovery. Most however still expect rates to remain on hold until at least December with last week even seeing record flows into the iShares +20y Treasury Bond Exchange Traded Fund of $1.7bn.