'Like playing darts while riding a unicycle': Markets just don't know what to make of UK politics right now

A trader at the CME.A trader at the CME.Scott Olson/Getty Images

  • The pound is hovering at about $1.25 as government uncertainty clashes with optimism about a Brexit delay. HSBC, Barclays and RBS have unexpectedly risen. Credit default swaps on UK government debt spiked.
  • As members from her own party try to oust her, May said on Wednesday that she will contest any vote on her leadership "with everything I've got."
  • "More permutations than you can shake a stick at," said one analyst, while another says rumors are driving the currency as much as facts.

Traders in the City of London are struggling to make sense of the markets after the shocking move by Prime Minister Theresa May's own party to try and oust her from power.

The pound hovered at about $1.25, after swinging up and down in London trading on Wednesday. One one hand, political uncertainty tends to be terrible for a nation's currency. On the other, a delay in Brexit, now looking more likely, would be welcomed as a positive outcome for the pound.

Uncertainty abounds: Credit default swaps on UK government debt, a form of hedge against uncertainty, spiked to 40 basis points from 31 basis points at the start of the month - the highest level since the Brexit vote.

Yet the share prices of companies the market links to Brexit outcomes have unexpectedly risen, with HSBC, Barclays, and RBS each up at least 1.6%.

Those gains are tracking rallies of more than 1% in both the UK benchmark FTSE 100 and the smaller, locally focused FTSE 250 index. (Though those have been helped by rising sentiment about the US-China trade war.)

May said on Wednesday that she will contest any vote on her leadership "with everything I've got." A vote will be held on May's leadership at 9.00 pm UK time.

Laith Khalaf, senior analyst, Hargreaves Lansdown:

"Trying to forecast market movements based on the outcome of unpredictable political events is a bit like trying to play darts while riding a unicycle. There is some measure of Brexit fatigue in place," and "political turmoil is largely priced in."

"There comes a point when yet more bad Brexit news is water off a duck's back."

Connor Campbell, analyst at Spreadex:

So far sterling has played the waiting game in regards to the impending vote of no-confidence in Theresa May. If the Prime Minister comes out the other side with her job intact, then it takes one of the many uncertainties that have swirled around UK politics for the last few months off the table. If she loses, on the other hand, then, well, the pound's likely going to have a very unpleasant run-in to Christmas."

John Normand, head of cross-asset fundamental strategy at JPMorgan:

"Our base case is that a Brexit deal is accepted. The possibility of no-deal Brexit through a hard Brexiteer being in power or a no-deal in Parliament could see sterling drop 5% to 10% and beyond that could see capital flight from the UK."

Kit Juckes, global fixed income strategist at Societe Generale:

Today's events increase the risk that Brexit is delayed beyond March and "will leave sterling, in real trade weighted terms, hanging like an albatross around the euro's neck."

Eoin Murray, head of investment, Hermes Investment Management:

"The challenge to Prime Minister Theresa May's leadership of the Conservative Party is just the latest step in what has been a tumultuous week of Brexitation. We are on track for a 'no' outcome of one flavor (no Brexit deal) or the other (no Brexit). But there is plenty more in this to run."

Neil Wilson, chief market analyst for Markets.com:

"More permutations than you can shake a stick at. The question for the pound is not who the leader is per se, but what it means for Brexit. Huge instability will remain whatever the result of the confidence vote. The clock is ticking on a no-deal exit, although there is now a higher chance that we could see Article 50 delayed to allow the UK more time. "

Hamish Muress, currency analyst at OFX:

"Theresa May's decision to fight for her job has left the pound in a state of limbo. With rumors now driving the currency as much as facts, the rest of the day for both market watchers and political analysts will be spent adding up Tory MPs and trying to work out whether the PM will be ousted. Uncertainty is the word of the day."

Simon Harvey, FX analyst at Monex Europe:

"The only given this morning is that volatility in sterling will rise in the run-up to tonight's vote."

Andy Scott, Associate Director at financial consultancy JCRA:

"One thing seems certain, it is unlikely that there will be much festive cheer for Sterling this season!"

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