Brexit Tension Tightens And Risk Takes A Tumble

Market Drivers Dec. 7, 2020

  • Equities dip at start of week
  • Cable drops by more than 100 pips on Brexit tension
  • -0.76% -0.51%
  • UST 10Y 0.94
  • Oil $46
  • Gold $1830/oz.
  • $19257/oz.

Conflicting headlines on Brexit sent risk on a rollercoaster at the start of week’s trade with risk assets first rallying on the start of Asia trade only to tumble into the European open.

The Brexit negotiations continue to hinge on the issues of fisheries and “level playing field” – a euphemism for preventing the UK from practicing regulatory arbitrage that would put European businesses at a disadvantage.

While most of the recent attention has focused on fish it is really the later issue that is the much more serious stumbling block. PM Johnson is adamant about preserving the spirit of Brexit which he views as the UK having full sovereignty and autonomy in its political and economic affairs and the most recent headlines which screamed that he was willing to walk away from negotiations suggest that this problem may be irresolvable.

tumbled by more than 100 pips touching a low of 1.3225 and remains near session lows ahead of North American trade. To most market participants its seems inconceivable that both parties will not be able to reach an agreement given the possible damage of break up to both, but at the moment political forces are trumping economic considerations and the chance of a hard Brexit has increased markedly.

A full confirmation of the failure of the negotiations would likely send cable below the 1.3000 figure, but for now sterling is trading as tough markets expect an 11th hour deal with bulls buying the dips in the pair ahead of the 1.3200 figure. There is no sense of panic yet, but if the newsflow does not improve soon it may come soon.

In the North American session, the focus will be on the “semi-stimulus” deal – a bipartisan bill of about $900B that appears to have the support of both Trump and McConnel and appears to have a strong chance of passing.

If there is positive news on both fronts – movement on Brexit and forward progress on US stimulus then the risk is likely to get another boost but with much of the upside already priced in the balance of risks now lies to the downside as any disappointment will trigger a sharp selloff move into the end of the year.

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