Morning Brief – Mirror, Mirror on the Wall

Mirror, Mirror on the Wall

Headlines in newspapers and on television screens have been captured by two phenomena in recent weeks. They’ve scrambled to simultaneously grapple with the chaos unfolding within the UK’s exit from the European Union and the protests in Hong Kong. Yesterday, both took a huge leap. The direction of that leap, particularly in the UK’s case, is as yet to be decided.

Snow White

So there you have it, Corbyn has officially called himself a Disney Princess. Comparing Johnson’s offer of a general election to the extension of a poison Apple by the wicked queen, the Member of Parliament for Islington North implied he’s Snow White. Watching the well-rehearsed bickering in the Commons yesterday I’m sure the squabbling pair might find themselves more akin to the ugly sisters in Cinderella. Just a thought for your next PMQs Jezza.

Following a hectic Prime Minister’s Questions at midday yesterday, Chancellor Sajid Javid presented his latest spending plan promising an already forgotten spending revamp. After his maiden spending plan, debate began on the rebels’ bill that seeks to force the UK to pursue a Brexit extension. Sorry Sajid, but if your speech is straddled by an address to the house by someone who’s calmly sacked 21 of his own party and a debate by those very MPs on the path of Brexit, no one’s going to pay a great deal of attention to you. Still, it takes guts to announce a “decade of renewal” as the ground you stand upon starts to crumble. Only hours later, the PM would (fail to) push for a general election. 

The bill passed 327 votes to 299 and before anyone gets handy with a calculator, yes, yes that is 52:48; a ratio that seems to be more pertinent to the UK than Fibonacci, five a day or 9-5. As promised by the UK leader, the bill passing the Commons yet again led him to trigger a debate on holding a general election. Unfortunately for him, the abstinence of the Labour Party meant that Johnson was embarrassed, failing to reach even close to the 434 votes needed to push for a public vote. 

In normal times general elections upset the value of a currency. They introduce an element of risk because you can never quite be sure what the public will do, cf. Brexit. However, with Johnson barrelling towards a no-deal, a perceived disaster for the Pound, the possibility of a change of administration creates the risk that an alternative government could come in and perhaps it wouldn’t run headfirst, blinkers on, over a Brexit cliff. The threat of an alternative forces Sterling bears, those who have bet on its demise, to buy protection and consequently buy the Pound. That’s what dragged the Pound up so much over the past two trading days. However, taking a position on the Pound still needs to be conditioned on the Royal ascent of the extension bill and then Labour’s willingness to contest an election. 

Bleating Lam

Hong Kong’s executive Carrie Lam has withdrawn the extradition bill that began the now months-old protests on the streets of the Chinese special administrative region. Some activists are saying it’s not enough; they want more, this small step has taken too long. However, despite their persistence, markets seem pretty convinced the withdrawal is meaningful to the path of its political economy. Whilst the USDHKD peg did not break on a spot value, the forward curve had some interesting action that saw it change direction and, on longer durations, break through the upper 7.85 bound. The spot value of the currency did well yesterday upon the news, appreciating by half a Hong Kong cent versus the US Dollar. But the forward curve is where the party really was. Instead of offering a discount on a contract to exchange USD into HKD as a point in time further in the future than two days, the market reverted to favour the Hong Kong Dollar on long duration trades. The price flip represents the restoration of confidence in Hong Kong and its currency, pricing out the risks that the riots confronted the economy with.

Discussion and Analysis by Charles Porter

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