Brexit whacks the pound
By Arnaud Masset
GBP/USD fell 1% to 1.3140. Speculators are reluctant to play the Brexit game, mostly staying out of the market. In the options market, 1-week ATM implied volatility rose slightly to 15.41%, while the 1-week 25-delta risk reversal measure eased slightly to -1%, which suggests that puts have more in demand that calls. The situation is also impacting safe haven currency pairs as the prices of put options on USD/JPY have rose compared to call options. Surprisingly, the ones on the Swiss franc have moved in the opposite direction, which may suggest that Switzerland may not be able to avoid damage from a hard Brexit on the EU economy.
Yesterday evening was a total disaster in the House of Commons. After hours of discussion, parliamentarians failed to pass any of the eight Brexit alternatives! “No deal” didn’t receive much love, just as “revocation to avoid no deal” did not. “Confirmatory public vote” was seen more favourably, but it was still short of victory. The results suggest that Conservatives would rather leave without a deal, which also suggests that the next prime minister will be a harder Brexiteer than current PM Theresa May.
Central banks to the rescue
By Peter Rosenstreich
The divergence of weak economies yet resilient equity markets is due to central banks’ pivot from normalization. German yields are back in negative territory and the US treasury curve is inverted: suggesting a weaker outlook. Central banks are moving from normalisation back towards reflation. With loose monetary policy, the cost of risk taking decreases. Central bank easing has driven the longest bull run ever and overlooked idiosyncratic risk events. In the coming month, China should introduce additional easing, Europe will provide modest fiscal easing, and the US-China trade agreement should settle: an encouraging backdrop for equity prices.
Despite Brexit chaos, risk premia are not fully priced. Uncertainty over the EU-UK relationship threatens 20% of the global economy, and economic data indicate that the global deceleration is lasting longer than expected.