Market Underpricing A 'Hard' Brexit
Swissquote Ltd | Sep 09, 2018 12:23
It's time to place your bets on the outcome of Brexit. From our view markets are playing it overly safe. Investors are pricing in an 80% probability to see a Brexit deal, with a 60% chance of a market neutral 'soft' Brexit. This will make my next few words seem exaggerated and farfetched. Gone are our expectations of a “'soft' Brexit. We don’t expect a realistic deal to be reached in time to meet the October deadline. Potently a headlines grabbing deal is put forward to lessen the impact of missed date, but that will likely fall apart under scrutiny. Agreed on 21-month 'transition' period to smooth the way for post-Brexit relations will not provide comfort when the October deadline is missed.
Even a loose form of a customs union for good and services will be hard to reach. And even harder to pass. News of German government abandoning key demands (accepting fewer details) and British willing to postpone key decisions until after Brexit day, has failed to ease the path to an EU-UK deal. Since a day earlier EU official described May’s Brexit plan as dead. Heighten politicking will drive GBP significantly lower and volatility higher as normalisation of elevated political volatility premium fails to occur.
While the three key divorce issues have in theory been settled, the devil lies in the 'details'. Judging from the hostility off the coast of France neither side is ready to give-up the details.
Key Dates
18th October 2018: EU summit. Submitted outline of future relationship to permit time for UK parliament and EU members to ratify deal by Brexit day.
13th December 2018: EU summit. Back-stop for October no agreement.
29th March 2019: 'Deal' or 'No Deal', Brexit is expect to occur 23:00 UK time.
The uncertainty surrounding the Brexit process is increasing, driving volatility in the GBP. GBP/USD has marginally rallied and is consolidating at the 50 DMA at 1.3010. We suspect this is more a function of closing profitable short then shifting positive expectations around Brexit outlook. Thursday is BoE MPC Bank Rate decision should be a non event and stick with existing outlook.
Disclaimer: While every effort has been made to ensure that the datat quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Swissquote Bank and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions, or regarding the accuracy, completeness or reliability of the information contained herein. This document does not constitute a recommendation o sell and/or buy any financial products and is not to be considered as a solicitation and/or an offer to enter into any transaction. This document is a piece of economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or in any other kind of investment.
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