The pound spirals downward and U.K. bank stocks plunge,
U.K. REGULATORS DISCUSS TURMOIL WITH BANKERS
LONDON/NEW YORK •The Bank of England and other regulators discussed the pound’s plunge and other market turmoil triggered by resignations from Prime Minister Theresa May’s government with about 10 City of London institutions on Thursday, according to a person briefed on the talks.
Executives from the big four U.K. banks — Barclays PLC, HSBC Holdings PLC, Lloyds Banking Group PLC, and Royal Bank of Scotland Group PLC — were involved in the calls, said the person, who asked not to be identified talking about a private meeting. So, too, were representatives from London Stock Exchange Group PLC and major investment-management firms.
The Financial Conduct Authority and BoE’s Prudential Regulation Authority, which are charged with ensuring the stability of the British financial system, wanted to touch base on a day when May’s draft agreement for Brexit triggered a political crisis in Westminster that could unseat her.
Shares in British banks fell sharply today, with RBS’s stock closing down 9.6 per cent, its steepest dive since the Brexit referendum itself in June 2016. Lloyds shares dropped 5 per cent and Barclays stock slipped 4 per cent.
Meanwhile, Wall Street is finding it harder to trade sterling as the drama surrounding Brexit roils the British currency.
The pound’s short-lived rally on Wednesday after U.K. Prime Minister Theresa May secured Cabinet backing for her draft deal turned to aggressive selling on Thursday as several ministers resigned and questions of a leadership challenge arose.
Cable’s one-month implied volatility spiked to the highest level since 2016 as the pound posted its biggest drop in more than a year against the U.S. dollar.
While passive algorithmic strategies can handle the extreme, headline-driven swings, it makes for a tough liquidity environment, according to Jefferies LLC.
“The news flow is far from over, the market is still short and any good news sees violent pops, which is met by selling from a very skeptical investor base,” Jefferies foreign-exchange head Brad Bechtel wrote in a note Thursday. The British currency “remains relatively untradeable at the moment, but I think the preference in the market is to hammer rallies still.”
The pound plunged as much as 1.9 per cent to US$1.2744 Thursday, from as high as US$1.3072 the day before.
Hedge funds and other speculators have been bearish on the British currency, holding a net short position since June, according to data from the Commodity Futures Trading Commission.
The gyrations prompted Aberdeen Standard Investments to exit their long pound position against the dollar, after wagering last week that cable could reach US$1.50 in the three months following a deal.
While the pound’s turmoil may have some traders backing away, Société Générale points out that sterling has been confined to a range against the euro and should continue to do so.
Strategist Olivier Korber recommends purchasing euro-pound one-year doubleno-touch options to play that range, with a knock-out at 0.85 and 0.94. The pair is currently trading at 0.8867.
Still, Jefferies isn’t alone in its caution.
UBS Securities LLC also recommended steering clear of the currency until the Brexit dust settles.
“Staying out of the pound in the short-term may be the best strategy,” said Vassili Serebriakov, a UBS macro strategist.
The Brexit uncertainty has put the brakes on investment and consumers.
With the decline in the pound, traders pushed back bets on the timing of the next Bank of England interest-rate increase, taking the view that the latest chaos in government will ultimately be bad for the economy.
A weaker pound, if it persists, will push up prices via higher import costs, which is bad news for workers who are only just starting to see real pay growth.
Even before the latest developments, there were reasons for concern.
Retail sales fell for a second month in October, and consumers’ view of the economic outlook has remained mired at low levels.
Meanwhile, U.K. economic growth is forecast by the European Commission to be just 1.2 per cent in 2019 and 2020.
That’s below the rates forecast for Germany, France and the euro area as a whole.
While the BOE sees a slightly stronger performance — 1.7 per cent in 2019 — that’s predicated on a smooth transition to a deal that’s an “average” of a range of good and bad scenarios.
Earlier this month, it cut its forecast for business investment growth to zero, and said companies are “now understandably postponing investment until they have greater clarity.”