Brexit Is No Longer So Frightening for Macro Investors

  • FTSE 350 keeps pace with Europe stocks; credit swaps decline
  • Implied pound volatility slips and gilts narrow gap to bunds

SocGen's Juckes Sees Euro Bear, Dollar Bull Perfect Storm

As the Brexit process lurches from one drama to the next, dominating U.K. politics, media and business decisions, traders have grown immune to noise surrounding the country’s departure from the European Union.

The British pound is trading near the highest in a year versus the dollar as attention turns instead to headwinds for the greenback. Sterling has even held its own against the advancing euro in recent days. Moody’s weighed in on Wednesday, raising the outlook for U.K. banks to stable, having cut it to negative last June in a reaction to the Brexit vote.

Is there any Brexit premium left in global markets? Call it last year’s trade -- or next year’s -- but for now signs abound of the disappearance, or at least acceptance, of risks around Britain’s departure:

The three-month implied volatility of the pound against the U.S. dollar, which measures expectations for swings in the currency, has been falling. It now trades below the same metric for the euro, which has been advancing as economic growth in the region gathers steam.

Earlier in the year, it seemed European stocks were poised to leave their British counterparts behind. But as the single currency’s jump curbs equities in Europe, their gains in 2017 have been pared and now match those of the FTSE-350 Index almost exactly.

The spread between U.K. and German 10-year bond yields has been grinding lower since November as the early concern over the impact of Brexit has subsided. And demand for the benchmark British notes remains strong; the bid-to-cover ratio at an auction this week was the highest since 2013 after recent economic data affirmed the likelihood the Bank of England will keep rates unchanged on Thursday.

The cost to insure U.K. debt against default for five-years surged after the Brexit vote. The country’s credit-default swaps have dropped about 14 basis points this year, however, and now trade at near the lowest since 2015.

Still, while Brexit may not be a primary issue for global markets right now, it’s more dormant than dead. As currency traders grow increasingly relaxed about the three-month picture, implied volatility for 12 months isn’t coming down so fast. The spread between the two hit the widest in more than a year in July:

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