Once Burned, Twice Steep

One almost hesitates when it comes to dedicating space to incremental Brexit news.

And certainly not because it isn’t absolutely critical that the UK and the EU cement a trade accord — it is critical. This week’s chaotic headlines documenting the calamitous effect of travel restrictions following Boris Johnson’s dark warnings about a more virulent strain of COVID-19 served as a poignant reminder of the UK’s susceptibility to trade route bottlenecks.

Indeed, some commentators cynically (and darkly) suggested that Europe, the UK, and possibly both, were overstating the threat from the “mutant” virus strain in order to give everyone involved the plausible deniability they needed to make enough concessions to seal a divorce deal.

Read more: A ‘Dark And Bumpy’ Road

Anyway, the problem with incremental Brexit coverage is that for more than four years, it’s been a fruitless, frustrating endeavor, much like Brexit itself.

Brexit has experienced more false dawns, faux deadlines, and provisional agreements than anybody cares to remember, so trumpeting an end to nearly a half decade of madness is always a risky proposition. It’s not “once burned, twice shy” as much as it is “forty times scalded, oh just forget it.”

And yet, on Wednesday, a real breakthrough appeared imminent as sources said UK and EU officials had agreed on a trade deal outline. The pound surged the most against the dollar since early last month, and a reflationary wave cascaded across markets.

Whether or not the initial headlines presaged a real accord, the associated price action is notable for the extent to which it offers a preview of what you can expect as macro hurdles are cleared.

Gilts obviously retreated, with UK yields jumping as much as 13bps. The bund curve steepened and that rippled through Treasurys. 10-year US yields touched 0.971%. The 5s30s steepened by nearly 5bps at one juncture, to the widest since 2016.

The 2s10s stateside hit 84.1bps in and around the Brexit headlines. That was the widest in more than three years.

Some of this will likely be faded, especially as the news continues to darken for the UK on the virus front (Johnson imposed harsher restrictions on an expanded list of locales Wednesday), but the point is simply that more than four years on from the referendum, Brexit is still one of the key macro hurdles.

Clearing it would remove a stubborn albatross from the market’s neck at a time when economic “normalcy” is still months away thanks to the persistence of the virus — and all its mutations.

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4 thoughts on “Once Burned, Twice Steep

  1. I actually think the ‘mutant’ virus here served a slightly different purpose. By creating car parks full of lorries prior to year-end, it has successfully blunted the fallout from the widely-predicted (by ‘remainers’) congestion come January 1st. Any teething issues with the new cross-Channel checks can now be at least partly attributed to Covid. I can’t abide conspiracy theories but this was just a little too neat for my liking.

  2. So the French were helping out the Brexiteers by closing the border for a day?
    Maybe the UK chose it’s moment to speak about the mutant COVID. I find a better explanation is that they delayed it until they could delay no more. The border chaos was Frances chance to stick the knife and and if anything focus the mind of the government that this is the trouble coming Jan 1st if negotiations fail.

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