Morning Brief – Tuesday 14th

Crunch Week

Time and time again, we’ve heard traders call the post-Brexit Pound Sterling ‘untradeable’. Even in times of apparent turmoil, realised volatility has remained relatively subdued with foreign exchange derivative markets confirming a lack of conviction amongst market participants with respect to Sterling’s expected movements. Typically, implied volatility remains dangerously elevated (measured by the cost of betting on a simultaneous appreciation and depreciation of the Pound to be totally hedged against price movement), with a skew towards upwards or downwards movement frequently imperceptible. 

However, this week, at least in the eyes of Foreign Secretary Jeremy Hunt, “is a crunch week”. 

The prominent member of May’s cabinet believes the pressure that both party leaders are facing from their back benches could cause a collapse in cross-party talks and a return to the House of Parliament in order to spur Brexit progress. This time around, indicative votes are likely to be out of the window with MPs’ intentions instead carrying serious weight in the chamber. Or to put it in terms more familiar to the incumbent Prime Minister: voting means voting.

Yesterday kicked off with Pound-spurring headlines this time in the Guardian. Taking a relative debut in the world of intraday Sterling-defining newspapers, the chief political correspondent for the left-leaning tabloid focused upon the shadow Brexit secretary’s claim that some 150 Labour MPs would not back a Tory-Labour compromise on the withdrawal unless the condition of a second confirmatory referendum was included.

With significant resistance within May’s own ruling Conservative Party already certain, this claim that almost two-thirds of the Labour Party would also defect from backing the deal born from both sides of the mace attracted significant attention. Consider the occasion upon which the cross-party accord does not include the second referendum and Keir Starmer is correct: whilst appeasing the Conservative Eurosceptic faction, May’s deal is sure to still fail with the support of only 79 Labour MPs. Alternatively, consider the paradigm in which a second referendum is included: not only would Conservative back bench support be eliminated but May’s own cabinet is likely to leave her side.

Markets, bizarrely, interpreted this news positively, with Sterling appreciating some 0.2% in the first few hours of European trading. The reaction was largely due to the interpretation that the above trade off would lead to a softer Brexit compromise. The other conclusion, the one that foretells of an increased unlikelihood of a Brexit compromise during these talks, was undermined by reports of more substantial progress from other media sources. As conflicting headlines continued throughout the day, Sterling too lost ground amidst widespread risk aversion as attention turned towards the escalating trade war.

Despite considerable displacement in the price of the Pound, we enter this morning’s trading day in a largely similar and uncertain environment. 

Discussion and Analysis by Charles Porter

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