Market Insights

Brexit Explained

As we head into the thick of UK-EU negotiations, it’s tough to see the detail in the fudgey murk. The BBC did its best last night with a Panorama summary of the situation, which can largely be summed up as:

  • PM TM telling the country “it’s My Deal or No Deal”
  • Labour’s Brexit Sec Starmer telling the country “Her Deal isn’t acceptable but neither is No Deal”
  • Brexiteer Rees-Mogg telling the country “No Deal suits me punk

Investors could be forgiven for dismissing this as noise. Except that Brexit relies upon those 650 MPs as they will have a ‘meaningful vote’ on the final deal. So for all the noises about the EU/UK negotiation, where Brexit Sec Raab tells a German newspaper this morning that the ball is in the EU’s court, and EU officials tell the Guardian they expect the UK to shift its position in its “darkest hour”, that really is just noise. What will MPs go for, with the clock ticking?

BlondeMoney is here to explain all.

Firstly, what will the deal be?

Click here for our quick and easy primer on the difference between Norway, Chequers, No Deal et al. It includes our probability for each outcome, where that would take UK asset prices, and how each might come about. We will be updating this matrix as events progress. We promise it’s easy to read. Print it out, laminate it. (Or if you’d like us to send you a hard copy, email us).

Secondly, what support does each option have in Parliament?

We have taken our analysis of each MPs ideological Brexit position and created dividing lines on our -15 (Remain) to +15 (Leave) scale by looking at what various MPs have said their red lines are. That leaves us with this chart:

But we know that ideology can go out of the window when it comes to the two masters for any MP: their leader and their voters. We have therefore gone through all Conservative Party MPs to check how many have publicly declared their support for Chequers, leaving us with this pie chart:

Theresa lacks a majority in Parliament even with this majority in her Party. She will need to rely on the support of others – and the Labour Party’s Emily Thornberry already declared they would vote against her. This threat is unlikely to apply across Labour due to the breakdown in party discipline on all sides.

Our team has further detailed analysis on the numbers for and against Chequers across Parliament. We will shortly be publishing this information which will give a clearer signal for how likely it is that Chequers can pass.

Thirdly, how do we get there? 

Here is a timeline of key events in the run up to Brexit Day next March.

As you can see, we are now in the thick of the Party Conference season. This matters in that it could easily shift the arithmetic for a Deal. Momentum matters. Public opinion will start to take shape. Why else would the Prime Minister let cameras into Number 10 for a primetime TV slot?

After Conferences conclude, there are only seven days of Parliament sitting before the EU Council summit meeting. It’s no wonder everyone has decided an extra summit will be required in November.

Then into December and January it will be the time for Parliament’s Meaningful Vote.

We will be watching for: 
SEPT: Alternative Plans or Credible Protests emerging against Chequers (likely)
OCT: EU shifting their position as a result (unlikely)
NOV: EU and UK ramp up threats to walk away (likely)
DEC: Parliament decides

We expect the market to respond:
SEPT: Excitement builds over a deal, +ve UK assets
OCT/NOV: Fear of breakdown followed by Euphoria over Deal
DEC: The Big Fear over Max Uncertainty as realisation descends that Parliamentary arithmetic is too tight

If you would like further details on our analysis and how it applies to you and your business, please contact us.

Why There Will Be ‘No Deal’ – In One Chart!

The BlondeMoney team has spent the summer going through all 650 MPs in the UK Parliament to determine their personal view on Brexit. We ranked them on a scale of -15 for the most “Remain” to +15 for the most “Leave”. We used 24 criteria, including:

  • their personal declared vote;
  • their position in any Brexit campaigning organisation;
  • their votes against their party;
  • and their declared views on Brexit.
  • We scoured the official Parliamentary records on Hansard along with their websites, articles and constituency briefings.

The results show:

  1. even a skilled leader with strong party discipline would have to reach across the divide for the votes required to pass a Deal through Parliament;
  2. the extremes at both ends of the distribution can form a strong enough minority to wreck a final Deal unless it moves in their direction;
  3. the centre of the distribution is still split by both ideology and Party

This is why we believe Parliament will be unable to agree on a Deal, which will ultimately lead to a change of Prime Minister and an inevitable crisis to flush out the necessary pressure to get a deal done.

With our database we can:

  • identify which MP sits where;
  • identify which MPs are most likely to shift position through a comparison with their constituency vote and their majority;
  • model how an MP might vote when it comes to the crunch;
  • model how different factions can block legislation or force amendments;
  • analyse how new leaders of any party might gain a power base.

If any of this would be useful for you or your colleagues, please let us know.

Like it or loathe it, we are about to enter the key period for Brexit risks. There are only 13 days of Parliament sitting until the October EU Summit. Before that, we have the key Party Conference season to get through, which will only serve to heighten these divisions. Business can no longer pretend it is ready for No Deal: contingency plans will be activated.

BlondeMoney is ready to be your Brexit guide. Let us know how we can help.

You Read It Here First…

The summer is almost over, and you, Dear Reader, are ready. You know that the market is primed for self-destruction, wound up into an unbalanced frenzy by Perma QE and the passive money momentum machine. And you know that it takes only one match to light the fuse. You know we will see Black Swan price action on White Swan events. So what's the event going to be?

One word, 6 letters, 2 syllables. Sounds like a Latin past participle for the verb "Brexere", meaning rupture with one's closest trading partner.

But just in case you weren . . .

Login or Sign up for a Premium account to read the full article.

Scores On The Doors

Another leg lower in the Turkish lira overnight, dragging down with it a whole bunch of other EM currencies. Measures announced by the Central Bank stopped the rot briefly, and USD/TRY now sits in the middle of a delightful 6.40-7.20 range. For comparison, in January the entire month’s range was only 3.76-3.95: we have done four times that in less than 24 hours.

The scores on the doors show:

  • Last week was the worst for the Turkish Lira since 23rd February 2001 – which itself came only after the central bank stopped defending the soft lira peg that was put into place after the IMF bailout. Back then, the central bank lost one-sixth of its FX reserves and interest rates hit 3,000%.
  • The sell-off in the South African Rand was the worst since 15th October 2008 – right in the heat of the financial crisis, when USD/ZAR moved from 9.07 to 10.74. Last night was Sunday twilight liquidity but USD/ZAR moved from 14.20 to almost 15.60 and back again

So we are seeing the kinds of moves that accompanied very serious financial market stress – and yet, aside from Turkey’s problems, there really isn’t that much stress around.

In any case, is this really that big of a crisis for an Emerging Market? Bloomberg burbled this chart to claim that no, it’s not:

To which we would respond:

  • August 2018 ain’t over yet folks!
  • Turkey 2001 occurred when a peg was abandoned, yet we have had something similar from a free-floating ccy
  • It’s of a similar magnitude to Russia 1998 which, er, led directly to the LTCM crisis

The last point is the big one. These big moves are happening because of systemic market leverage. The system itself is unstable. Erdogan isn’t to blame for that.

Commentary on Turkey so far simply says:

  • This was obvious; an accident just waiting to happen.
  • Erdogan engineered this, he interfered with the central bank, that’s why it was so bad.
  • Turkey needs this to reverse direction. Markets force change.
  • It’s August so it’s illiquid anyway.
  • …and the impact on other markets should be limited. The ECB is ready to help European banks and they’re already doing QE; the Fed won’t care; the VIX hasn’t budged anyway.

Why don’t we want to see the truth?

  • QE chopped off the downside of any distribution. Passive money removed forward-looking judgment. The future would look like the past.
  • But now QE is stopping. Passive money created a tracking mechanism that falls apart when prices shift dramatically. The future hits us in the face suddenly.

We here at BlondeMoney keep being told that this is all too obvious. That when something happens it will be something unexpected.

We disagree. As we said in Junewe now have Black Swan price action on the evidence of White Swans” and “the real Black Swan will be an event that sends the pendulum into unstoppable overdrive and will be a combination of:
1) positioning and pricing are the exact opposite of where they should be due to a new – or previously ignored – risk
2) flows shift
3) positions tracking passive products like ETFs are forced to liquidate”

Turkey certainly delivered us 2 and a hint of 1 and 3. Here is the iShares Turkey MSCI ETF compared to its “intrinsic value” during the course of Friday:

As you can see there are some large deviations between the two, despite the website for this ETF showing only a Premium of 0.59% “as of August 10”. That’s only derived from its end of day NAV, but as we know the joy of ETFs is that they can be traded intra-day. This one is quoted in USD. But all of its holdings are listed in Turkey.

And that’s before we even go into how on earth an “intrinsic value” can be calculated when liquidity means the price on the screen for stocks or bonds or currencies is not necessarily the price that they can be traded for in reality.

It’s no wonder that we are getting wild price moves when liquidity is so misunderstood. Here’s 1 month USD/TRY implied volatility. It’s now higher than it was during the financial crisis:

We need to look at Turkey with fresh eyes. It’s not about the risk itself, worrying as that might be if you have exposure to Turkey. It is about how a market can spin wildly out of control when the entire system is as unstable as it now is.

We continue to believe that Brexit will be the next big shoe to drop:
1. A previously ignored risk
2. Flows shift – note Financial News reporting today on fund managers triggering contingency plans for a No Deal. ‘Allianz is working out a strategy to ensure it can continue to do business in the UK in the absence of any transitional arrangement. CEO Andreas Uterman said: “I never thought it would come to this”‘
3. Positions

Only 3 is yet to fall into place. We expect that to come in September.

In Memoriam

Today I learnt of the passing of the man who taught me all about the markets. And a good few things about life too. Forgive me then for a moment to remember him.

Armed with a Classics degree from Cambridge, a dramatic flourish of melancholy from Northern Ireland, and a handy bit of know-how from amateur boxing, Ed had charisma, knowledge and tenacity in spades. We met just after September 11th 2001, at Merrill Lynch. I had just started as a graduate, plunged into the foreign exchange desk in the midst of recession, and the omnipresent Bin-Laden-induced threat of War. Ed had that memory seared upon him more than most, having been on an introductory trip to the ML NYC office and seeing the second plane crash into the towers.

During the mayhem, he revealed his true calling: teaching. He was the only person who sat down with me to give me a structure to this new crazy day that kicked off at 7am. “Write down the opening levels when you walk in”, he urged, “and a few bullet points from the morning meeting… that will get you through the day without looking like an arse”.

Looking like an arse was the usual state of affairs for a graduate trainee. He did his best to help me, not only to understand what was going on, but also to get used to an environment where failure meant money losses or even job losses. That meant no kid gloves, for which I am eternally grateful. You’ve never really experienced humiliation until the dealing desk turns round and looks at you when you take your first phone trade, and instead of “Mine” or “Yours”, you meekly tell the trader “His?”.

No-one laughed more than Ed, who thumped me on the back and told me not to f**k it up next time.

That was Rule No.1 of course: “Don’t F**k it Up”.
Rule no.2 was inevitably, “Never forget rule no.1”.

Fortunately he didn’t let me sink or swim too far on my own in those early days. He would step in if I found myself out of my depth, but never by patronising me. He would encourage me if I did something well, but never by promoting arrogance. A few months in, he called into the desk for a market round-up. I seriously reeled off some information about non-farm payrolls, technical levels and the Euro hitting parity against the Dollar. Silence. He chuckled. One of his excellent cigarette-and-alcohol-stained chuckles. I braced for the inevitable criticism. He simply said, “F**k me, you almost sound like a real salesperson, praise the f**king Lord we are making something of you my girl!”.

Having passed the test, I could join the various client events and drinking sessions in our nearest pub, the Viaduct. (Why they literally built an investment bank on top of a pub, I’ll never know). I was part of the gang. It didn’t matter that I had a cleavage, Ed just cared that I had a brain. For a team of 40 people with only 4 women in it, this was a blessed relief.

He and his Northern Irish buddy, the Ballymena Academy boys, were the only men who didn’t treat me any differently because I was a woman. They watched out for me. They wanted me to succeed.

In latter years Ed would tell me how proud he was of the part he played in my success. He could never, unfortunately, be happy with his own.

He was the cleverest man I ever worked with. The most charismatic with clients. The smartest about trades. The most humble. The most honest. Someone who I believed in as much as he believed in me. If only he could have believed more in himself.

The demons chase us all. If we are lucky, we can escape them or at least shove them where they haunt us least. For the man we called Little Old Edmundo, it proved an ongoing battle that ultimately ended only in the harshest form of peace.

He was no angel. The greatest teachers rarely are. It takes an understanding of both darkness and light to teach someone how to navigate the path ahead. We argued, we cried, we shouted, we hugged, we laughed. We learned. And what could be a greater gift in life than that?

— RIP My Friend —