Brexit : MPs in denial
Yesterday evening was a total disaster in the House of Commons. After hours of discussion, MPs passed on all eights Brexit alternatives put to vote. As expected the ‘no deal’ plan B didn’t receive much love (160 for and 400 against), just as the ‘revocation to avoid no deal’ (184 versus 293). The ‘confirmatory public vote’ is the one that was views more favourably but it was still short of 27 votes (268 versus 295). The ‘customs union’ with the UE was also one of the most popular, but unable to get the majority for approval. The results suggested that the Tories would rather leave without a deal, which also suggests that any replacement for Theresa May should be a harder Brexiter than the current Prime Minister. Theresay hasn’t decided yet whether she’ll put her deal to vote one more time before the end of the week. After two rejections, it would most likely suffer a similar fate, even though she promised to resign should the deal passes.
GBP/USD has been trading in a volatile range since the beginning of the week. Starting I late European session yesterday, the cable fell roughly 1% to 1.3140 and has been grinding slightly higher since then. Looking at non-commercial positioning data from last week, as reported by the CFTC, we notice that speculators were reluctant to play the Brexit game as they mostly stayed out of the market. In the option 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 call contracts. 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 the damages from a hard Brexit on the EU economy.
Central banks to the rescue
Many of us are watching markets and Brexit chaos wondering why risk premia is not fully priced. Not only does uncertainty over EU-UK relationship threaten 20% of the global economy but economic data continued to indicated that the global decelerations is lasting longer than expected. In addition, many analysts expected deeper slowdown, due to weakness in manufacturing and trade from where we are today. We believe the divergence between weak economic performances yet resilient equity market is due to central banks pivot from normalization. With German yields back in negative territory and US treasuries curves inverted the FI market is clearly suggested weaker outlook. The Fed shifting dots is a clear signal that major central banks are moving from normalizations back towards reflation. With loose monetary policy conditions the cost of risk taking decreases. We have witness the powerful effect of central bank easing by driving the longest bull run and overlooking idiosyncratic risk events. The direction of inflation suggest that changes the current dovish bias is unlikely. In the coming month China should introduced additional easing measure, European provide modest fiscal easing and geopolitical support from US-China trade agreement provide and encouraging backdrop for equity prices.
Elsewhere, TRY has been on roller coaster ride of stomach turning effect. Markets have reacted to government interventionist measure stopping financial institutions from working deal that would directly lead to liar deprecations. This follows on the heels of suspend the one-week repo auctions. This singular move should be consider a 150bp hike on bank financing. Re remain constructive on USDTRY as the financial chaos will begin to spill over into political disorder.
