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Which Brexit?

12 March 2019 by jbchevrel

Today was characterized by divergent price actions in CDS and FX worlds. While most look at GBP (spot, points, vols) to gauge Brexit sentiment, other asset classes did not follow it closely today, in particular, UK high-yield CDS. While the GBP undoubtedly came under pressure (-0.6% vs USD -1.1% vs EUR), we can see on the above chart that UK names were actually the outperformers in HY CDS space. A lower GBP tends to create an optical outperformance of UK assets (equities), compared to Eurozone ones (today UKX +0.3% vs SXXP -0.1%). But most of the UK HY names present in the XOver would be arguably more vulnerable, in case of a ‘hard’ growth-destroying Brexit. Fundamentals aside, it seems that the answer for this price action divergence resides in technicals. While short gamma players have tended to exacerbate price action in GBP, the strong performance in high-yield single-name CDS can be partly explained by the skew activity, in that space. Minutes before the schedule for a 2nd meaningful vote, Reuters reported that the deal was expected to lose by c100 votes, similar to last week’s report by the Telegraph. Adding to that, HuffPost UK just reported that a 3rd meaningful vote was getting pencilled for next Monday (Mar 18), just days before the EU summit (Mar 21-22).