UK Crash Brexit revisited

Highlights:

• While a crash Brexit is not our base case, the path towards PM Johnson’s declared goal – a deal with the EU without a backstop – remains unclear. A further delay may be necessary and PM Johnson may be stepping down. A care taker government could either bring a deal to a 2nd referendum or resort to snap elections.
• Opinion polls see Tories plus the Brexit Party broadly on par with opposition parties, keeping the risk of a hard Brexit alive. In such a case, we expect GDP growth to suffer by 3.5 pp of GDP compared to baseline until 2021.
• Despite the current low yields, a no-deal Brexit would trigger a new broad-based downward shift of sovereign yields on safe haven flows, a worsening economic outlook and an even more aggressive monetary policy accommodation
• EUR/GPB would be headed towards parity, while also EUR/USD would decline on safe haven flows.
• European stocks would suffer severely. The more defensive UK FTSE100 should outperform due to firms’ high organizational flexibility, international exposure, undervaluation vs EA and an already cautious investors’ positioning.

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