UK Economic Comment "UK: Burnham wins by-election - what's next?" Titareva

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UK Economic Comment "UK: Burnham wins by-election - what's next?" Titareva

customs union, or freedom of movement. Instead, its strategy focuses on areas such as

security and defence, energy and climate (including UK participation in the EU electricity

market and emissions trading system), regulatory cooperation in financial services,

reducing trade barriers in the food sector, and youth mobility. Any further integration

would entail a trade-off between greater access to the EU market and reduced

regulatory autonomy. We see four potential paths to closer cooperation: first, an

enhanced sectoral approach with deeper regulatory alignment across additional sectors

- likely the least contentious but also the least ambitious option; second, a “Swiss-style”

framework of bilateral sectoral agreements, offering greater flexibility but likely to face

EU resistance; third, a customs union, which would significantly simplify trade in goods

but not improve market access for services; and fourth, single market participation (EEA-

style), which would grant access for both goods and services but is the least likely option,

given the requirement to accept free movement of labour.

Rates strategy (Mustafa Oguz Caylan): Capped yields from fiscal risk for now

We think Burnham’s comments on adherence to fiscal rules have, for now, capped the

upside in gilt yields from domestic factors. The recent rally in gilts reflects easing

geopolitical tensions and lower oil prices, rather than a repricing of the fiscal risk

premium. Real yields remain around 40bps higher than before the Middle East conflict.

This reflects markets pricing out BoE cuts, as well as increasing spillovers from the

US rather than pricing out fiscal risks. US real yields are higher amid resilient growth, a