Boris Johnson, U.K. foreign secretary, arrives to attend a meeting of cabinet minsters at number 10 Downing Street in London, U.K., on Tuesday, July 3, 2018.

Chris Ratcliffe | Bloomberg | Getty Images

The direction Brexit will take could become clearer this week as U.K. Prime Minister Boris Johnson prepares to meet his German and French counterparts.

Johnson’s journey to Berlin Wednesday and Paris Thursday will be his first official trip abroad since being installed in 10 Downing Street in July. Johnson has repeatedly rubbished the existing Brexit deal on offer and has said the U.K. will leave the EU on October 31 “come what may.”

But there is a desire in the British government to strike a new deal, making the meeting with German Chancellor Angela Merkel and French President Emmanuel Macron a potentially crucial one if talks are to resume.

The U.K. government has scrambled to defend its Brexit plans in the last 24 hours following a leak of an internal report, entitled “Operation Yellowhammer.” It warned of widespread disruption at ports, a hard border with the Republic of Ireland and potential shortages of food, drugs and fuel that could happen in the event of a “no-deal” Brexit.

The report also claimed that Gibraltar, a British territory on Spain’s southern coast, was “underprepared” for a no-deal scenario in which the U.K. leaves the EU abruptly on October 31 with no transition period in place.

‘Scaremongering’

Government minister Kwasi Kwarteng dismissed the leaked report, which had been compiled under the previous government, as “scaremongering.” Another, Michael Gove, the minister in charge of no-deal Brexit planning, said the leaked report outlined “absolutely the worst-case” scenario.

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Gove conceded there would “inevitably be some disruption, some bumps in the road” in the event of a no-deal exit but said the U.K. government was “far more prepared now than it was in the past” for such an eventuality.

That view was echoed by Gibraltar’s Chief Minister Fabian Picardo, who told CNBC Monday that more planning for a no deal had taken place since the Yellowhammer report had been compiled.

“What you saw in the Yellowhammer report yesterday cannot, in my view, be described as scaremongering because it’s the thinking of the government of Gibraltar, and the thinking of the U.K. government, of what the worst-case scenarios that we have to plan for are. And that iteration of the plan is already out of date and a lot of planning has been done in order to ensure that those outcomes are dealt with,” he told CNBC’s “Squawk Box Europe.”

“But look, in a no-deal scenario a lot will depend on the politics of the morning after,” he added.

Shadow boxing

Johnson is expected to push for a new Brexit deal when he meets his German and French counterparts this week although, according to British media reports, he will continue to insist that the U.K. is leaving the EU on October 31 with or without an agreement.

The EU has said it will not renegotiate the terms of the withdrawal agreement it struck with former Prime Minister Theresa May.

Johnson will also reportedly tell Macron and Merkel that the U.K. Parliament cannot stop a no-deal Brexit, even if a majority of U.K. lawmakers vote against it.

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Kamal Sharma, director of G-10 foreign exchange strategy for Europe at Bank of America Merrill Lynch, likened the state of play between the U.K. and EU to “shadow boxing” before the real fight begins when the U.K. Parliament returns from its summer break.

“This is very much, at the moment, a shadow boxing contest between the Europeans and the U.K. The real substantive issues happen in September when we come back to (the U.K.) Parliament. Has parliament got the ability to reign in on a no-deal Brexit?” Sharma told CNBC’s “Capital Connection” Monday.

Markets are spooked at the prospect of a no deal under Johnson. The U.K.’s sovereign bond yield curve inverted last week for the first time since the financial crisis. An inversion means that longer-term interest rates (in this case, the U.K.’s 10-year bond) fall below shorter-term rates. It’s considered a sign that some investors see a recession approaching.

Altaf Kassam, managing director and the EMEA head of investment strategy & research at State Street Global Advisors, told CNBC that a lot of the bad news was already priced into the market.

“We are feeling that even though a Brexit is a lose-lose for the U.K. and EU, we’re reaching peak negative news flow at the moment,” he told CNBC’s “Squawk Box Europe” Monday. “Post the inauguration of Boris Johnson the hard Brexit was fully priced in, so I don’t think there’s much more to come in terms of negative price action in the U.K.”



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