Weekly Market Update: Sterling depreciates as no-deal probability increases

Mon 02 Sep 2019

Read our full Market Update Week 35

Market Analysis

There were gains across the board last week, as China indicated it had no immediate plans to retaliate to the latest round of US tariffs. In Sterling terms, global equities were up +3.0%, led by US equities which were up +3.7%, as trade-sensitive technology and industrial sectors benefited from China’s conciliatory tone. EM, European and UK equities were also up +2.0%, 1.9% and 1.6% respectively. However Japanese equities gained only +0.6%. Sterling was mixed, down -0.9% vs the US Dollar, but up +0.4% vs the Euro. UK 10Y Gilt yields remained stable, closing the week at 0.479%, while US 10Y Treasury yields fell -3.9bps to 1.496%. In US Dollar terms Gold fell -0.4%, coming off recent highs, while Oil gained +1.8% and is up over 20% for the year.

CIO Analysis

This week is expected to be the last week where MPs against a no-deal Brexit are able to prevent this outcome through legislation. After this week it appears the only remaining paths to preventing no-deal are Boris Johnson and the EU re-negotiating the Withdrawal Agreement so that it wins over Eurosceptic members of his party and can pass through Parliament, or if the Government loses a vote of no confidence following prorogation and ‘rebel’ MPs can form a ‘Government of National Unity’. A General Election is unlikely to prevent no-deal as Boris Johnson can set the date after the 31 October deadline. Neither of the remaining options look likely  – the complexities around the Irish border situation will need far more time, while it is hard to see Conservative or Labour MPs willing to prop up a government headed by a member of an opposing party – making a no-deal Brexit the most plausible outcome. Sterling currently sits near the bottom of its trading range since the referendum in 2016 as markets, like us, believe that no-deal is probable. We would expect a confirmation of no-deal to see further weakness in Sterling, although the extent is questionable given the negative sentiment already in the price, while avoidance of no-deal would result in a rally. Overseas holdings in portfolios should cushion the impact of a depreciation in Sterling and UK assets, although now the ‘tail-risk’ is that no-deal Brexit is somehow avoided, Sterling rallies, so that overseas holdings fall in common currency terms. It is a sign of the times that we are living in that an event that is market positive could be considered a ‘tail-risk’.

– David Baker, CIO