Bullish Brexit sentiment is not catching

Summary

An outbreak of bullish sentiment in the UK was mostly limited to sterling and even the pounds gains were evaporating fast towards the close of UK trade.

Facing Wall Street

An outbreak of bullish sentiment in the UK is mostly limited to sterling as worrying signals from U.S. Treasurys keep global shares under pressure. British stocks, at least the top tier of the market, are more orientated to hints of recession from U.S. yields than to UK politics. At the same time, the pace at which sterling regained some tone is also keeping blue-chip buyers away.

Getting realpolitik

Having maintained a firm bid from early in the European session, sterling buyers showed little inclination to ease up by the half way point, though caution returned eventually. The pound’s bounce—by as much as 128 pips against the dollar and 60 versus the euro—from close to 17-month lows hit on Tuesday owed almost all momentum to a reinterpretation of parliamentary events from a realpolitik perspective. The market now looks to be downplaying dark implications from a potential constitutional crisis. Instead, focus is increasingly on the possibility that an historic government contempt ruling, and a dizzying host of further developments could prevent Brexit happening at all.

Sterling confidence

True, the validity of mapping odds that Britain may not leave the EU, is as questionable as it would be for any uncertain event.  JPMorgan now says chances have risen to 40% from 20%. Well, it’s less arguable that the odds have shortened, at least. Sterling remains deeply entrenched in ranges established a fortnight ago. But its biggest daily rise since 28^th November points to increasing confidence in recent floors, even before highly likely tumult next week.

Healthy scepticism

Still, as we head towards one of the most momentous weeks in UK politics for decades, it is worth maintaining perspective. Note sterling nowhere near made it to the top its roughly two-week range in the high $1.28s. Nor has it even matched Tuesday highs around $1.2840. Those were just short of corroborated resistance at $1.2850, near hourly peaks on 28^th and 29^th November. The shortfall reveals that enough healthy scepticism remains in the market. That underlying sentiment is backed by high demand for options covering the next trading week. Implied volatility – how wildly sterling could gyrate – has shot back to fresh 18-month highs for spot-week trades. In other words, as the real endgame looms, speculators continue to position for some of the biggest sterling surges of the year. Investors, who tend to use options to protect cash, aren’t taking any chances either. The pound could have further buoyant episodes before Tuesday, but the market hasn’t felt the last sharp whipsaw just yet.