Theresa May’s Brexit push veered off the highway and onto the rumble strips again on Thursday, as Brexit Minister Dominic Raab and Pensions Secretary Esther McVey resigned.
Raab’s exit presents “an even higher risk that the deal will fail to pass Parliament”, Nordea’s Andreas Steno Larsen said, adding that the risk of May being forced to step down and call snap elections is “high”. Danske Bank’s head of FX echoed those sentiments, noting that a strong November might well “turn to cold December” for sterling.
Nomura’s Jordan Rochester chimed in as well, stating the obvious, which is that it’s “hard to be optimistic on GBP in the short term”. “The market loves a narrative and [Raab] is a big resignation so hedging flow for the parliament vote and/or leadership threats will see GBP head lower”, he added, before reminding you that May has “survived worse.”
“The key is whether May has to bow to parliament and allow amendments before the vote”, Standard Bank’s Steven Barrow notes.
In case it isn’t clear enough, this is an unmitigated disaster. I know there are readers out there who will invariably write in to tell me that yesterday marked “progress” and that Thursday’s turmoil aside, we’re closer than we’ve ever been, but closer to what, exactly? Spoiler alert: Closer to a future marked by even more uncertainty than what’s been playing out since this farce got started in June of 2016.
This looks like the worst day for the pound in nearly a year and a half.
Sentiment has deteriorated meaningfully. One-month 25d riskies traded today at 225bps in favor of pound puts – that would be the most since July 2016.
10Y yields in the UK are down 10bps on the day.
If you ask ING’s Martin van Vliet, we’re headed to the October lows there. “If further bad news will be forthcoming, which is quite possible, then end of October low of 1.38% may be tested”, he said this morning.
The next BoE hike has now been pushed out to 2020 from November 2019, which I guess sets up a scenario where the central bank is going to need to try and navigate the choppy waters around this mess while simultaneously guarding against inflation.
“This is a major issue for the global economy, as well as for life in the United Kingdom as a whole, yet often feels in the moment increasingly untradable”, former trader turned Bloomberg columnist Richard Breslow laments on Thursday morning, adding that “not only is the headline risk real but the interpretations of those tape missiles are all over the map.”
Yes, yes they sure are.