Fra BNP Paribas:
KEY MESSAGES
Our new base case is that Article 50 gets extended,
with a second referendum being a likely outcome,
or even a pre-condition for an extension.
Its announcement would probably see a sharp
re-pricing of UK assets, as markets adjust to a
higher probability of a cancellation of Brexit and a
significantly lower probability of ‘no deal’.
However, uncertainty would persist for another 6-9
months, possibly delaying the next rate hike.
What’s more, the ultimate outcome would depend
crucially on the design of the ballot – a “remain” is
not a given.
Parliament looks likely to reject Theresa May’s Brexit
deal, when it finally gets the opportunity to vote. We
don’t think that the EU’s “clarifications and
assurances” will be sufficient to win the support of
Conservative eurosceptics, the DUP or Labour MPs.
Parliament would likely seek to exert control over the
process thereafter. While there are numerous options
on the table, including a shift to a ‘Norway plus’
model, we see more likelihood of majority support
among MPs for a second referendum.
This throws up a number of key issues, including the
process of holding one, the politics and the design of
the ballot itself. At this stage, we would not want to
speculate on the precise question or outcome, but we
expect it would result in either leaving with the
negotiated deal, or remaining in the EU.
Most markets, besides equities, look to have priced in enough political and economic
uncertainty for now. As a result, we expect range trading is likely to develop in the near term until there is further clarity over the Brexit outcome.
Near-term dynamics aside, should a consensus for a second referendum build as we expect
will likely be the case, UK assets are likely to perform as a higher probability of a ‘no Brexit’
scenario would likely be priced in while odds of a disorderly hard Brexit would recede (but not disappear).
Given the above, investors may consider the views and structures below to position for an
extension of Article 50 and growing expectations for a second referendum as follows:
• Rates: Pay 10y10y GBP swap versus EUR (70%) and USD (30%).
• Rates: 1y1y/3y1y GBP OIS swap curve steepeners.
• FX: It’s almost time to buy GBP, we think.
• FX: Room for GBP vols to reprice higher around potential referendum dates.
• Equities: Wait to sell FTSE100/go long BNP Paribas domestic UK basket
• Credit*: Buy February or March Xover ATM receivers
