No-Deal Brexit Rollercoaster Isn’t Alarming Investors Yet

Boris Johnson’s threat to walk away from the European Union without a trade deal is leaving most economists and traders unruffled for now.

After years of negotiations punctuated by ultimatums and standoffs before the U.K. finally left the bloc in January, many analysts are yet to be convinced by the prime minister’s latest threat to tear up parts of the divorce agreement he signed only a year ago -- and abandon talks.

No-Deal Brexit Rollercoaster Isn’t Alarming Investors Yet

Economists from Goldman Sachs Group Inc., JPMorgan and Morgan Stanley all still anticipate a deal on commerce will be in place in time for the end of December. While Johnson insists he’s willing to accept economic disruption, analysts assess that such a move at a time when Britain is struggling with the Covid crisis would be a risk too far for him.

“We know how the Brexit rollercoaster went last year and we think that’s a pretty good guide,” Stephanie Kelly, senior political economist at Standard Life Investments, said in a Bloomberg Television interview. “It’s most likely we get a deal. The incentives are all still there to get a deal.”

That skepticism is reflected in foreign-exchange markets. Risk reversals, a gauge for market sentiment, show that pound investors are less bearish about the next six months than they were in 2018 and 2019, when the prospect of a no-deal departure dominated the rhetoric.

No-Deal Brexit Rollercoaster Isn’t Alarming Investors Yet

That said, the pound on Monday dropped as much as 1% against the dollar, albeit on a day when the U.S. currency strengthened more generally against counterparts. With sterling near $1.32, Valentin Marinov, the head of Group-of-10 foreign-exchange strategy at Credit Agricole SA, says the rout could extend to $1.20 if no deal emerges.

The U.K. currency traded down 0.2% against the dollar as of 7:37 a.m. London time Tuesday.

Johnson has set a deadline of Oct. 15 for a trade accord, and the U.K. is due to leave the EU single market and customs union when a transition expires on Dec. 31.

U.K. moves to row back on parts of the EU withdrawal agreement could hamper proceedings. The government plans to publish new legislation this week designed to dilute its legal force if outstanding issues on the thorny question of Northern Ireland cannot be resolved.

‘Really Unhelpful’

“This is Brexit brinkmanship,” said ING NV’s Head of FX Strategy Chris Turner, who sees an even chance a deal will still be reached. “Deadlines can get extended, as we have always seen, and threats made right up to the last moment.”

Not all analysts are convinced Johnson is bluffing -- and Sebastien Galy, a senior macro strategist at Nordea Investment Funds SA, is one of the skeptics.

“We’ve actually been betting on a no-deal for a long time,” he said. “It’s just not the type of shock you’d want to have within a Covid-19 crisis. It’s really unhelpful.”

In such an outcome, both sides would face costly quotas and tariffs on goods trade, and enormous levels of disruption at the border. That could prove particularly damaging for Britain as it attempts to claw its way out of the deepest recession of any major economy in the second quarter.

Johnson, who led the pro-Brexit campaign in 2016 and staked his reputation on seeing the process through, argues a bad deal would be worse than no agreement. He says leaving even without an accord is a “good outcome” for the country.

But the prime minister will still end up opting for an agreement even if it’s at the last minute, according to Malcolm Barr, chief U.K. economist at JPMorgan.

“Having tested each other’s resolve, a late intervention by political leaders will generate a messy compromise which provides for a ‘skinny’ deal, with both sides opting to avoid the disruption,” he wrote in a report on Monday.

©2020 Bloomberg L.P.

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