Market Report: EU/UK trade deal in focus, FTSE 100 rises and gigafactory disappointment for EV manufacturers

by | Feb 27, 2023

Written by Susannah Streeter, head of money and markets, Hargreaves Lansdown

Dawn may be about to break on a new era of calmer relations between the UK and the European Union, but hopes still aren’t racing away that it will herald a significant post-Brexit boost for the economy.

The pound hasn’t powered up significantly, despite European Commission President Ursula von der Leyen’s visit to the UK to finalise agreement with Prime Minister Rishi Sunak on the thorny question of checks on goods  for Northern Ireland.

Any deal would be a significant step forward, and this new consensual approach should help for other thorny political problems such as migration but in itself, it’s unlikely to move the dial much for a big uplift to UK trade immediately. There are some lingering concerns about opposition in parliament, which would have to ratify the deal, but the power of the Conservative rebels has been weakened.

Sterling has moved slightly higher but is still hovering under $1.20 with more focus on the direction of interest rates in the US with expectations that they’ll have to go higher and stay elevated for longer.  Friday’s core PCE inflation reading is still front of mind for investors, given that it’s the Fed’s preferred measure of prices. Its strength is a red warning light about the stickiness of inflation which is why three fresh rate rises are now expected in March, May and June.

With no big fire lit under sterling and recent weakness persisting,  it has given support to the internationally focused FTSE 100, which benefits from a weaker pound given that it boosts earnings made overseas in dollars. The FTSE 100 has batted away the risk-off sentiment which has hung around during trade in Asia and opened higher. Rolls Royce and British Airways owner International Consolidated Airlines Group are among the top gainers in early trade. Brent crude is hovering around $83, up very slightly, as concerns about weakening demand for oil in the global economy continue to be offset by worries about supply as Russia cuts output.

News that the battery gigafactory in Northumberland will see the light of day now that Australia’s Recharge Industries has taken over will come as a relief to the region, given that swathes of new jobs are still expected. It will provide little solace for the UK car industry, given that battery storage will be the focus for production, with a shift only to high end sports cars expected later.

There will be bitter disappointment that the much hoped for new cog in the mass production wheel for EVs still looks a long way off. Battery production hubs closer to car factories are considered increasingly important at a time when global supply chains have turned more brittle. It means motor manufacturers with British plants will still be on the backfoot, compared to those with sites across Europe, given more gigafactories are planned on the continent.

The fact that Recharge is a start-up rather than a larger more established player may raise worries that it may also have bitten off more than it can chew, given the problems encountered by Britishvolt, and the difficulties it faced accessing funding. This turn of events is likely to add to the clamour for the UK government to provide more incentives for home-grown companies investing in clean technologies, with worries mounting that the country could be left behind as big subsidies are being dangled in Europe and the US.

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