As Brexit dominates headlines, it is not dominating investors. UK 2-year and 10-year gilt yields rose slightly to +0.825% and +1.287% (+2.46% and +2.30% percentage change) while the British pound remained almost untouched, bouncing by +0.46% against the EUR and slightly lower against the greenback (-0.02%). Investors had already priced in the scenario of yesterday’s defeat for the government; they expect Brexit to be postponed. Still, given a negotiating period that has already lasted two years, it is hard to see delay as a GBP positive. Unless the European Union makes a U-turn, unlikely, the only viable solution would be to cancel Brexit.
Industrials, including automakers, remain worried. A disorderly Brexit would have a drastic impact on supply chain and the competitiveness of UK-based production. Border checks would definitely have an impact on the delivery of finished products. Reduction of foreign investment in the country is very likely, which would irreversibly weigh on economic growth and employment data long-term. Currently trading at 1.2875, the cable is expected to bounce back along 1.2920 short-term. We recommend investors to remain cautious: the GBP could easily head south. The next big event will be tonight’s no-confidence vote, which the government is expected to survive.
By Vincent Mivelaz