The chaotic trading in cable continues, this time spiking to the upside after Bloomberg reports that the EU and U.K. have reached an agreement on the sensitive issue of the role of the European Court of Justice after Brexit, according to two people familiar with the matter.
The agreement on the court leaves the Irish border as the only obstacle to talks moving on to the future relationship.
As a reminder, EU leaders are due to decide whether talks can move on at a summit on Dec. 14-15.
European diplomats began hashing out what they want from the next stage of Brexit talks this week, seeking a united stance they can present to the U.K. The envoys will start to discuss the ideal length of the transition phase, its scope, and whether the bloc would impose the EU"s "four freedoms," including free movement of people. For now, cable has been relatively stable, but as Bloomberg"s Mark Cudmore warns, the pound"s resilience to negative news may not last much longer.
Via Bloomberg,
This week’s round of Brexit negotiations are absolutely crucial.
With the exception of the Bank of England’s Super Thursday, sterling has traded well in the past two weeks, shrugging off a host of domestic political turmoil.
That dynamic is persisting today. The market has shown little reaction to the FT story that major financial institutions are close to a Brexit “point of no return” after which they’ll start moving “thousands” of jobs out of London, or to reports that Theresa May is on the verge of losing a second top minister in a week.
When a market shows an asymmetrically positive reaction to news, it’s normally a bullish sign. But things may change soon.
Underlying positioning has played a particularly critical role in trading sterling this year.
March saw short positions reach the most extreme level in history, according to CFTC data. That was the catalyst for the Bloomberg Pound Index to rally by 6% in less than two months.
September then saw CFTC positioning turn positive for the pound for the first time in almost two years.
The market is now roughly neutral on sterling.
You can see this in the analyst notes from banks. Brexit bears have tired of aggressively playing that theme without reward. And since the main argument of sterling bulls was that people were overly pessimistic, that angle has also evaporated.
This leaves sterling fresh to trade on a new macro theme. All it needs is a catalyst.
The fundamental backdrop for the currency is very poor: extremely negative real yields, sluggish growth and a large current-account deficit. So, barring any solid arguments to the contrary, the path to a weaker pound is well marked.
There’s valid optimism that the U.K. is finally on the verge of making progress on a Brexit deal. But what is abundantly clear is that we are now past the time when any negotiations-disappointment will be ignored by currency traders.
Some clear positive must come from this week’s Brexit talks, otherwise it could be time for long-term structural sterling bears to come out of hibernation.
A day after Brexit negotiations officially began, and seemingly unable to get over the result of democracy, George Soros is once again rattling his op-ed sabre, proclaiming the ignorance of British "brexit" voters is about to get its come-uppance...
Economic reality is beginning to catch up with the false hopes of many Britons.
One year ago, when a slim majority voted for the United Kingdom’s withdrawal from the European Union, they believed the promises of the popular press, and of the politicians who backed the Leave campaign, that Brexit would not reduce their living standards. Indeed, in the year since, they have managed to maintain those standards by running up household debt.
This worked for a while, because the increase in household consumption stimulated the economy. But the moment of truth for the UK economy is fast approaching.
Soros said Britain’s eventual exit from the EU will take at least five years to complete, during which the country will probably hold another election.
“If all went well, the two parties may want to remarry even before they have divorced,” he wrote.
Bank of England Governor Mark Carney, in a speech at London’s Mansion House on Tuesday, said domestic inflation pressures remain subdued and signaled he isn’t in a hurry to raise interest rates. In his first major comments in six weeks, he also said he wants to see how the economy responds to the “reality of Brexit negotiations.” However, Soros warns that time"s up...
“We are fast approaching the tipping point that characterizes all unsustainable economic developments,”
“The fact is that Brexit is a lose-lose proposition, harmful both to Britain and the European Union. It cannot be undone, but people can change their minds. Apparently, this is happening.”
If the Brits had just left it all up to him and his elite brethren, everything would be awesome we are sure... and Soros has a final solution...
If May wants to remain in power, she must change her approach to the Brexit negotiations. And there are signs that she is prepared to do so.
By approaching the negotiations in a conciliatory spirit, May could reach an understanding with the EU on the agenda and agree to continue as a member of the single market for a period long enough to carry out all the legal work that will be needed. This would be a great relief to the EU, because it would postpone the evil day when Britain’s absence would create an enormous hole in the EU’s budget. That would be a win-win arrangement.
Simple enough - despite the majority of Brist now in favor of Brexit, you should all shut up and do as your told!
The pre-Brexit complacency - echoed by the polls, the media, and the establishment - is absolutely not being repeated ahead of France"s looming election. While bond spreads have blown out, investor fear in the European equity options market is considerably worse than pre-Brexit.
As Bloomberg"s Tanvir Sandhu notes, the spread between April and May Europe stock volatility futures has climbed on French election risks...
And is starting to outstrip the rally seen in the equivalent contracts heading into the U.K.’s EU referendum.
The vol spread has risen to about 5 from below 1 at start of February; that compares to pre-Brexit vote high of 8. Howeever, as the chart below shows, ahead of Brexit, the spread started to ease as polls consistently showed Remain would win... before exploding higher on the actual vote.
That complacency is very much not in evidence this time as Frexit fears mount. The question is - are equity investors over-anxious or bond investors still too complacent...
Notably, investors fear that polls underestimate the risk of a Le Pen win following last year’s Trump and Brexit outcomes, although the French election may have a lower probability of surprise vs polls.
The reaction to The House of Commons vote on Article 50 yesterday was overwhelmed by Fed-driven dollar-flows but, despite a relatively hawkish Bank of England this morning, Cable finally caught up to the implications of the vote and that Brits are one step closer to Brexit...
