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Which Pound Are You looking At?

27 June 2016 by lberuti

When he said this morning that “the pound is stable, markets are stable”, I am not sure which pound and which markets Boris Johnson was referring to. Traders have had three days to digest the Brexit vote, and they punished the British pound by sending it another 3% lower today against the US dollar and against the Euro. They also punished UK banks by sending their stocks another 10 to 15% lower, after having already marked them down on Friday by a similar amount. The same pattern was obvious in credit as well. Financials underperformed other sectors (the fair value of iTraxx Financials Senior was 10.8bps wider at 133bps, compared with a 5.4bps widening of iTraxx Main’s fair value at 98bps), and UK banks underperformed other financial institutions. We have seen some profit taking by investors holding short risk positions and it has so far helped to contain the move wider, but the reality continues to kick in and the inherent uncertainty of Brexit is not going to go away anytime soon. We are in unchartered territory and it is difficult to imagine the risk premia’s widening ending in the very short term.