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Brexit Bulletin: War Games

Brexit Bulletin: War Games

Brexit is 24 days away.

(Bloomberg) --

Today in Brexit: The politics of Brexit rumbles on, but the markets are planning for any outcome.

What’s happening? The European Union wants significant changes to Boris Johnson’s Brexit plan, but the British Prime Minister is sticking to his pledge to take the country out of the bloc on Oct. 31. With no compromise in sight, financial market players are making plans for life after a no-deal Brexit. There’s a lot in play, and a lot at stake.

The central bank would step up in a no-deal Brexit. Bank of England Governor Mark Carney found himself center-stage after the original Brexit vote in 2016, and would likely do so again. Interest rates would be cut at the first opportunity after Oct. 31, according to Deutsche Bank AG, but a disruptive divorce could also require a wider fiscal response. Bloomberg’s David Goodman has been war-gaming the BOE’s likely approach to no-deal.

Pain for sterling and stocks. The pound could fall as low as $1.11 in a worst-case scenario, foreign-exchange analysts and strategists say, and U.K. stocks also vulnerable to a selloff despite the support from a weaker exchange rate. Bloomberg’s Joe Easton and Charlotte Ryan have a full trader's guide to the Oct. 31 scenarios. The choreography will be crucial, said Kenneth Broux, a strategist at Societe Generale SA. “If this goes down to the wire on the 30th because of a legal procedure and markets are kept waiting, the one-day or one-week shock will be greater.”

Watch the bond markets after a no-deal exit. U.K. government debt has traditionally been a safe haven for global investors, returning almost 20% since the 2016 referendum while the pound has slumped by 18%. But as Anooja Debnath and John Ainger report today, that could quickly change after Oct. 31. Any crash in the bond market would drive up the U.K. government’s borrowing costs, making it more painful for any post-Brexit administration to spend its way out of trouble. 

Brexit Bulletin: War Games

A crash is by no means certain and U.K. officials say the gilt market is in a relatively solid position. In any case, there’s a lot of politics to play out yet. Opponents of a no-deal Brexit think the so-called “Benn Act” will force Johnson to seek an extension. That’s given pound traders confidence that a delay is in the cards. We’ll find out in the coming weeks.

Today’s Must-Reads

Brexit in Brief

What Happened at the Weekend? | French President Emmanuel Macron and Boris Johnson spoke by phone on Sunday, their offices said. Macron said an assessment would be made by Friday about whether an agreement is possible, amid EU concern over what the U.K. plan would mean for the bloc’s single market, and for the Irish peace process. Johnson’s office said the EU should “not be lured into the mistaken belief that the U.K. will stay in the EU.” That line is prominent in the U.K. press this morning.

Anything Else? | Johnson defended his Brexit proposal in The Sun, insisting “We are leaving in 25 days.” His Brexit Secretary, Steve Barclay, took much the same message to the pages of the Sunday Telegraph and faced questions from the BBC’s Andrew Marr. He told Marr there could be some wiggle room in the U.K. position regarding customs checks between Ireland and Northern Ireland, but gave no details.

Sacking and Sabotage | The British press was alive with stories suggesting how Johnson’s team plan to circumvent the so-called “Benn Act” that requires the prime minister to seek an extension if no deal is agreed by Oct. 19. The Sunday Times reported that Johnson will dare the Queen to sack him rather than step aside and let the Brexit deadline slip; The Sunday Telegraph said Johnson will “sabotage” the EU if forced to request the U.K. stay in past Oct. 31.

‘Big Mess’ | Dutch Prime Minister Mark Rutte spoke to Johnson on Saturday, later tweeting that “important questions remain about the British proposals.” Finnish Prime Minister Antti Rinne, whose country currently holds the EU presidency, was blunt: “It seems Johnson only now understands what a big mess it is and he’s struggling to make a suggestion to get him out of it,” he told Germany’s Welt am Sonntag. However, Poland’s Deputy Foreign Minister Konrad Szymanski said in an interview with the daily Rzecpospolita that Johnson’s proposal was a “serious starting point to talks” and should be considered.

Amid All That | The prime minister’s tough line on Brexit seems to be paying off at home, according to a poll by Opinium for the Observer newspaper on Sunday. Johnson’s Conservatives are 15 points ahead of Labour, the pollster found. The biggest shift in this week’s poll was a 5% drop in support for the Liberal Democrats, who propose revoking Article 50 and canceling Brexit.

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To contact the editor responsible for this story: Chris Kay at ckay5@bloomberg.net, Leila Taha

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