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Brexit stasis calms UK markets

Article By: ,  Financial Analyst
November 16, 2018 8:01 AM

Summary

The sense of calm that has filtered into UK markets, partly from elsewhere, makes it into the closing stretch of the week.

Sterling stays put, like Gove

Brexit stasis – Theresa May obviously has no intention of considering her position – and an apparent stemming of the stream of ministerial exits, bring surface stability to sterling. The remaining cabinet touchstone, Michael Gove, Environment Secretary, said he would not resign, adding he had confidence in the Prime Minister. Those determined to oust her have reportedly failed for the umpteenth time to coral the number of consents required to trigger the beginnings of a confidence procedure. Neither the PM, nor the Brexit deal draft, are out of the woods yet. For one thing, that is evident in the pound traded against the dollar having been obdurately stuck under the ‘crisis range’ of roughly $1.2814-$1.2837 since Thursday’s nosedive.

‘Crisis range’

Traders are using the band as a rough and ready gauge of the crisis. Continued GBP/USD trade below signifies the degree of confidence lost in the pound and possibly in the economy due to risks of a no deal/bad deal Brexit, has yet to return. Below the week’s $1.2722 low would represent further deterioration of the situation that might begin to look terminal for the deal and perhaps the government. More positively, other cues suggest volatility is beginning to abate. Most notably, sterling implied volatility – that rate at which options trading projects the pound will swing – is set to close lower for the first day after six consecutive daily elevations to new two-year highs. Actual volatility, as per the simple volatility index in the chart below, has also ebbed.

Technical analysis chart: sterling/dollar spot – 30-minute intervals - 16/11/2018 12:31:34

Brexit remains a tinder box of course. The next pinch point is most likely to be a parliamentary vote in December. But another upset could come as early as the EU meeting at which the draft is meant to be ratified, late this month. We expect that market participants will require further and clearer fundamental indications that this is now a more of a crisis passed to let their guard down further.

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