UK: Macro developments taking place all over the Europe – TDS

Richard Kelly, Head of Global Strategy at TD Securities, suggests that in terms of markets, we have been fairly orderly as no one is stressing over funding and no one is stressing over liquidity.

Key Quotes

“In fact the best characterization is that very few are doing very little at all. Perhaps the most telling comparison to make so far of the lack of immediate crisis is that 2y GBP basis is down 5-7bps so far today, compared with 60bps on the back of Lehman.

This lack of funding and liquidity stress has limited the immediate contagion and feedback loop into driving a further deterioration in risk sentiment. Cable is up 5% off its lows, and now down only 7.5% on the day. The FTSE lost £137bn in value on the open, but we have steadily seen retracement there, while S&P futures have retraced about 40% of the initial moves. Bund yields saw a low of almost -17bps but are now at -8bps, while 10y Bonos gapped wider on the open but are now just 10bps higher on the day.

Some certainty politically has helped support this. PM Cameron has announced his resignation, to take place by the Oct 2-5 Conservative Party Conference, and he will leave it to the new leadership there to move forward with invoking Article 50. This gives a bit of breather for markets that there will be some interim stability rather than a rush to the exit. At this stage, it seems more likely we have a change in leadership of the existing government than a move to new elections. There have also been calls for a vote of confidence in Labour Leader Corbyn on Monday, a likelihood of a new Scottish Referendum (though this likely won’t be immediate), and even some call for a referendum in Northern Ireland (which seems doubtful at this stage).

Similarly, this was followed up by BoE Governor Carney telling markets that the BoE will not hesitate to “take measures as required,” and that the BoE stands ready to provide up to £250bn in liquidity if the banks ask for it, in addition to FX liquidity. He said the MPC would take the next few weeks to assess, which suggests to us the odds of a July rate cut could be in the 30-50% range, but we would still see our base case as a 50bps rate cut by August, followed by £100-200bn in QE by the Autumn.

There will be a G7 conference call today at 12:30pm London time / 7:30 am Eastern time, this announcement has likely also helped to support markets so there may be some risk if nothing materializes, but we would expect at least a statement to follow.  So far, we have seen the SNB intervene in FX markets and confirm this, clear statements of intent from Japanese officials but no action as of yet, and only implicit threats of action from others.

The founding six members of the EU (Belgium, Germany, France, Italy, Luxembourg, Netherlands) will meet on Saturday. There may be some thinking they look to try to offer an option of a better deal to the UK and could hold markets in today and present risks for Monday trading, but this should probably not be seen as a likely compromise at this stage.

The EU must now discuss what is needed for the EU to weather this political shock and maintain momentum for the euro. If that means trying a better deal for the UK, there is a chance, but their laser focus will be on any internal reforms to ensure there are no dominos to other remaining members.”