U.K. Markets Unmoored by Political Storm Set for More Volatility

(Bloomberg) -- The pound and gilt yields may fall further as the chaos rippling through U.K. Prime Minister Theresa May’s Cabinet spooks markets, according to analysts.

The resignation of Brexit Secretary Dominic Raab will spur market volatility with prospects including fresh elections and a second referendum now looking more likely, according to Toronto-Dominion Bank.

Here is a roundup of analyst comments on the outlook for sterling and gilts:

ING Groep: Gilts to Rally

  • U.K. gilts will rally, with 10-year yields set to fall toward the 1.38% closing low reached last month, according to strategist Martin van Vliet
  • “It is risk-off on all fronts with gilts leading the way,” he says
    • “If further bad news will be forthcoming, which is quite possible, then end-of-October low of 1.38% may be tested”

Rabobank: Pound Risks $1.27 on a No-Confidence

  • Raab’s resignation is a “reflection of the deep split within the Cabinet and the lack of broad-based support for the deal,” and will underpin the difficulty that May faces in pushing the agreement through parliament, according to strategist Jane Foley
    • Sterling could drop to about $1.27 and 90 pence per euro if vote of no confidence becomes more likely for May; will dip further if she loses vote
  • “If Parliament cannot pass the deal, it would seem more likely that there could be a referendum on it -- though May has always ruled out another referendum and there are valid concerns that another Brexit vote could be very divisive”

Commerzbank: Next Pound Support Near $1.27

  • Pound’s next support seen near the October lows around $1.2700, according to strategist Thu Lan Nguyen
    • Raab’s departure is a major blow to Theresa May’s leadership and indicates the amount of opposition to her deal

Danske Bank: Parliament Vote Seen ‘Challenging’

  • Raab’s resignation suggests the passing of the Brexit bill in Parliament will be even more challenging for May, according to Christin Tuxen, head of currency strategy
    • Strong November could “turn to cold December for GBP”, says risks in EUR/GBP are “chiefly on the upside”, if the parliament vote happens on Dec. 10 as rumored

Standard Bank: Sees ‘Low-Mid $1.20s’

  • Raab’s resignation will embolden others to follow suit, building pressure on the pound, according to strategist Steven Barrow
    • Sees pound dipping to low-mid $1.20s and near 90 pence against euro
  • “The key is whether Theresa May has to bow to parliament and allow amendments before the vote”; any speculation about a second referendum could lift the pound, provided ‘remain’ is on the ballot

©2018 Bloomberg L.P.