No Deal BREXIT Back in Focus



Fears of a no-deal BREXIT are back to haunt the UK financial markets.

With the relationship between the EU and Britain reaching a new level of discord, investors hammered the GBP with an intensity that has not been seen since the height of the virus chaos in March.

Money market investors are stepping up bets the Bank of England will cut rates below Zero for the 1st time in its 326-yr history, and options markets are pricing in the likelihood of deeper losses for GBP. Excluding mid-March, last wk will be recorded as sterling’s worst selloff since Y 2016.

And that’s not the only thing worrying investors. The China Virus is spreading rapidly once again in the UK and there is concern companies will slash hiring if the government’s wage support program expires at the end of next month.

Here are the Key moves in UK markets, as follows:

PM Johnson’s ‘Rogue State’ Upended Brexit in Just a Week

Sterling sank 3.7% on the wk to $1.28, the lowest since 23 July. The weakness is even starker against EUR, which strengthened after European Central Bank President Christine Lagarde seemed unfazed about the currency’s recent rally. At 92.58p Vs the EUR, the GBP is near some of the highest marks seen over the past 5 yrs.

At stake is whether the EU and UK can negotiate a trade deal before time runs out. Talks between the 2 sides were thrown into crisis last wk after PM Johnson’s government proposed breaking international law to re-write the BREXIT separation accord.

Traders turned to options to hedge against the possibility of future volatility in GBP. Risk reversals, a gauge of market positioning and sentiment, show a steep increase in Bearish sterling bets.

BREXIT is back and GBP could fall to $1.18 on a chaotic break from the EU.

With Britain’s economy far from pre-virus chaos marks, negative interest rates are a hot topic of speculation and traders will be closely studying any comments after the Bank of England’s meeting Thursday for any clues.

Money markets last Friday priced in a cut below Zero as soon as February and see a reduction of almost 20 bpts by the end of next year.

Monday, traders are factoring in rates remaining above Zero until September 2021.

Investors have also started snapping up protection against faster inflation, which could be triggered by GBP’s devaluation in a no-BREXIT scenario. The premium on short-dated UK breakevens rose 25 bpts over the US during the week, the biggest increase since March.

UK breakevens have performed very well at the front-end and that’s to do with no-deal BREXIT risks being priced into the market.

Some parts of the bond market still seem calm despite the fractious UK and EU relationship. In prior times of stress, traders sold Irish bonds, sometimes against French debt, because of the country’s close ties and vulnerability to the UK economy.

Have a healthy week, Keep the Faith!