For the second time in two years the British government is on the brink of collapse, but markets are, overall, buoyant.
London shares resilient
By mid-session the FTSE 100 stands 1.3% higher. It has strengthened steadily since open and only around a tenth of its shares are trading lower. Of these, most are down less than 1%. At least one, oil field services provider Wood Group, which fell as much as 10% earlier, is reacting to concerns unrelated to Brexit.
The mid-cap FTSE 250 gauge is also up 1.3% despite more of its companies making more revenues in the UK and, consequently, tending to be more sensitive to UK politics.
Only the FTSE 250’s December futures contracts, expiring Friday week, betray that something might be up with a small fall. Prime Minister Theresa May has just begun a session of PMQs and it could be one of the most fraught for years. Still, it’s unlikely new shocks will emerge, so markets can be expected to remain resilient.
Further afield, stock markets are also a clear sea of blue with all large European markets positive. They’re tracking a robust equity session in Asia, encouraging Wall Street futures to rise too. In short, if the Brexit crisis is coming to a head, there’s something about the way that’s happening that’s keeping a lid on panic.
'Bremain’ in play
True, the biggest driver of the rebound is that investors are beginning to buy Washington’s take on trade talks. But make no mistake, news that enough Conservative MPs have submitted a letter to trigger a No Confidence vote in is seismic. But markets have long been willing to look past heightened hard Brexit risk if events take a turn that could avoid Brexit entirely. Such thinking looks to be in play again. For one thing, whilst Theresa May has pledged to fight the confidence vote with everything she’s got, she has also toughened warnings to Brexiteers about the chance of a No Brexit. Her statement earlier noted that a new leader “wouldn’t have time to renegotiate a withdrawal agreement…so one of their first acts would have to be extending or rescinding Article 50, delaying – or even stopping it”.
At the same time, remain campaigners have dropped support for the ‘Norway-plus’ alternative Brexit deal to concentrate on a second referendum. Senior opposition Labour Party figures, officially neutral to the idea, have moved almost to full endorsement. Leader Jeremy Corbyn said on Sunday that another referendum would have to be "qualitatively different to the one held before".
Sterling up for air
Optimism is even showing in sterling, the market most sensitive to Brexit. The pound traded against the dollar was up some pips from latest 20-month lows just now. This is partly due to profits being realised on short trades. But the motivation to do so in itself also reflects a growing assessment worst-case risks are decreasing. The technical price chart of sterling traded against the dollar below shows the market is inching within the range where selling was most intense this week (see ellipse).
The probability of clearing $1.266 resistance looks quite low. Optimistic instincts aside, sterling could yet fall further in the near term.
GBP/USD
To be sure, at no other time since the Brexit vote has trading in the pound been this chaotic, with huge falls against the dollar, euro, yen and other major currencies since the end of last week of between 1%-2%, far higher than usual. Implied volatility in sterling options trading, which projects how wildly the pound will gyrate was beginning to cool off in trades covering the festive season. Now demand for such contracts and others covering the next few months, is accelerating to new two-year highs.
What next?
Indeed, whilst bookies odds point to a Theresa May win, what if she doesn’t? Sterling’s Brexit link would obviously be in full effect in that scenario. With a near-perfect storm of volatility on tap, psychological vagaries could easily see the pound spike to near $1.20. And whatever the outcome of tonight’s vote, within months, the effects of the currency’s latest collapse will show up in the economy, in inflation, interest rate expectations and growth.
The feedback loop to the pound could keep it under pressure. With no obvious candidate to succeed May within the Conservatives, her defeat would not reduce uncertainty before the end of March. If she wins, the best conditions for sterling would be if the tally of those voting against her is low.
The threshold required for a no confidence motion to be carried is 158 out of 315 Conservative MPs. If less than 100 vote against May, pressure for her departure would diminish, if not evaporate. We would then back where we were at the beginning of the week, when things were barely more certain.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.