The Big Bet Now Is On Britain’s Unreliable Polls: Trading Brexit

(Bloomberg) -- A week from now investors will know three things: the name of the U.K. prime minister, the likely path of Brexit and whether their gamble on Britain’s infamous election polling has paid off.

The prospect of a Jeremy Corbyn-led Labour government is quickly being priced out of the market. The pound has climbed against the dollar five days straight through Thursday, up 9% since August when it closed at a more than three-decade low. In stocks, utility companies which would be nationalized under Corbyn’s socialist agenda are rising.

Traders are betting on a Conservative Party majority as the market’s preferred outcome -- one predicted by every poll. These forecasts have been wrong before, and some asset gains are starting to look overdone.

Ahead of the Dec. 12 vote, here are some key moves:

The Big Bet Now Is On Britain’s Unreliable Polls: Trading Brexit

Sterling jumped the most against the dollar since mid-October on Wednesday and hit the highest level versus the euro in more than two-and-a-half years as polls showed the Tories holding their lead over Labour.

But investors can glean a deeper insight in the options market, where the price of contracts to exchange currencies in the future shows how much volatility the market expects. Pound-dollar options indicate that expectations for post-election swings next week have jumped the most since 2016 as traders look to capture the aftermath of the vote.

The Big Bet Now Is On Britain’s Unreliable Polls: Trading Brexit

Risk reversals, which protect against pound declines, show the most bearish sentiment since the June 2017 election. That may have something to do with the fact the pace of pound gains looks extreme. The pound’s 14-day relative-strength index hit 72 this week. A reading above 70 is usually a sign that an asset price has risen too far, too fast and is poised to retreat -- or at least pause.

Before this week, sterling’s RSI breached 70 only three times in the past year, and each occasion preceded a decline. The pound slipped 0.2% as of 8:39 a.m. in London on Friday.

The Big Bet Now Is On Britain’s Unreliable Polls: Trading Brexit

While all this plays out, some British stocks are hurting. The pound’s rapid appreciation is no help to the benchmark FTSE 100 Index, which comprises global corporations that reap revenues in foreign income. The Stoxx Europe 600 Index is up 8.9% since sterling’s August low. The FTSE 100 has fallen by almost 1%.

Yet one sector is having a good run. Corbyn has pledged to nationalize water and energy providers, a risk which overshadowed the first half of the year for U.K. utility stocks. But as Labour has lagged in the polls these companies have recovered against European counterparts.

The Big Bet Now Is On Britain’s Unreliable Polls: Trading Brexit

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