• Speech unlikely to deliver material shift in UK position
  • Content seen more about uniting cabinet and party ahead of Tory conference
  • Market reaction could still be noticeable, with sterling pairs, UK equities exposed, particularly given timing of speech ahead of final hour of trading this week

“Theresa May isn’t particularly loved or feared at the moment; but by the end of today she hopes to instil a little of both in the right camps: fear in the EU that she is not afraid of the cliff edge and a little more love among the party faithful ahead of the Tory conference next week.

The PM is likely to make certain overtures in an attempt to kick-start the next round of talks on September 25th, and this ought to give some direction to the pound.  If the market decides this speech means the next round of talks have a chance then the pound could rise. If not, recent rate-hike speculation based gains could erode. The FTSE 100 looks like being a straight sterling-based play given the negative correlation between the pound and the blue chip index.

But while there’s a lot of chatter around the Florence speech, it may not be that decisive. These things have a tendency to over-promise and under-deliver and details will be thin on the ground. It is questionable that she can ‘break the deadlock’ as some suggest, given the meat of any negotiations take place behind closed doors.

Assessing the leaks of the speech so far and the ground we have travelled over in recent months, it is likely that the UK is prepared to make some small concessions on citizens’ rights and the divorce bill in return for staying in the single market over the transition period.

But the idea that this will wash with the EU is fanciful. The €20bn being touted, although it is an improvement as it would mean no budget hole for the rest of the bloc, is a long way short of what the EU wants.  Michel Barnier will give his riposte almost immediately and it would seem likely that we will hear him repeat the EC/EU’s stance that the UK is not offering enough.

First, the EU wants a longer-term commitment on contributions. €20bn may be seen as a start, but just that. Second, maintaining ‘access’ to the single market after 2019 is a demand that the EU may be reluctant to grant as it may be viewed as too favourable to the UK. The EU will see this as more of the same – the UK wanting to have its cake and eat it. Brexit means Brexit, Mr Barnier will no doubt repeat back to Mrs May. Remember the EU still believes it can dictate terms and still wants to meat out punishment.

In addition, the content seen so far does not suggest anything fantastically new or creative. We know already that the government would by and large prefer a two-year transition deal to avoid a cliff-edge and we know that it would need to pay for that by continuing to contribute to the EU budget. If this speech crystallises this then fine, but it so far looks like nothing materially new and therefore it is hard to see how it can shift the negotiation process a lot further forward. And again while markets would welcome a two-year transition deal becoming formal UK policy, it remains unclear if the EU would be prepared to agree unless it gets significantly more assurances than Mrs May can offer today.

The fact that Mrs May managed to get the cabinet to agree to the draft also suggests meaningful shifts in the UK’s position are highly unlikely, given the divergent opinions among ministers. The show of unity between Hammond and Johnson is probably a sign that the speech treads a narrow and well-worn path.

We must also exercise caution about reading too much into the contents of the speech as it comes shortly ahead of the Conservative Party Conference, which starts on October 1st. This is a highly political (and short term) speech that is as much about her leadership of the Tory party and getting the cabinet behind her ahead of the conference, as it is about the Brexit process.


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