BANK OF AMERICA: Markets are too optimistic about Britain's Brexit deal

LONDON — Investors are too optimistic about the UK’s chances of securing a Brexit trade deal, according to the latest research from analysts at Bank of America Merrill Lynch.

As many as 70% of investors said that they “expect a transition of near-EU membership for at least 1-2 years,” according to a note circulated to clients on Wednesday from BAML’s European Economics.

Analysts Robert Wood, Gilles Moec, and Sebastien Cross argued this is unrealistic.

“David Davis suggested a customs union only transition was the furthest the UK would consider,” they say, noting that this would “disappoint market expectations.”

“We think the UK remaining in the single market would be unsustainable in the long-run: it would mean accepting EU rules without any say,” BAML says, noting that this would not be politically viable given the government’s staunch commitment to leaving the single market, and its recent position papers, which effectively rule that out.

Here is the chart of market expectations:

Last week the Department for Exiting the EU (DExEU) published its official plan to leave the customs union in March 2019 and negotiate a totally “new” customs relationship with the EU, which would “minimise disruption” and be as “frictionless” as possible.

The British side hopes the EU will agree to a bespoke, time-limited customs arrangement, which will protect the UK economy from a “cliff-edge” Brexit and allow businesses to carry on as normal during an interim period, according to the position paper.

That position paper effectively rules out staying within the single market during any transition period, regardless of how long that period is, meaning that it seems an awful lot of the market will be disappointed.

There is a crack of light, BAML argues, saying that the chance of the government choosing to remain in the EEA — doing a massive u-turn in the process — cannot be completely ruled out.

“Of course the more optimistic scenario markets seem to be pricing in appears to have become more possible now, but we think the risks are skewed to the downside of market assumptions.”

Get the latest Bank of America stock price here.

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