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UK lagging: Brexit update

07 September 2020 by jbchevrel

Today was a relatively quiet session, due to the US being out (Labour Day). The main piece of news was about Brexit. The FT reported Sunday that the UK is planning to override some key parts of the withdrawal agreement. According to this report, sections of a UK internal bill (to be published Wednesday) aim to eliminate the legal force of parts of the politically sensitive protocol on Northern Ireland that was agreed with the EU last year. Without surprise, the EU’s leadership had no choice but warning the UK that any future trade deal would be conditional on the respect of last year’s agreed Brexit divorce terms. EC president Von Der Leyen said last year's withdrawal agreement was “an obligation under international law and prerequisite for any future partnership”. Logically, UK CDS under-performed continental Europe CDS, on the day. In financials (ex: Lloyds HoldCo Snr +2.5 Sub +5 OpCo unch.) and corporates (Next +5bp, Rolls +14bp) underperformed. Main and Snr indices were unchanged. In financials, there was no real HoldCo Sub/HoldCo Snr RV moves, in 1:2, with HoldCo Sub wider by +4/+5bp. however there was a clearer decompression between HoldCo CDS and OpCo CDS, as far as the three UK domestically focused banks are concerned (Lloyds, Barclays, RBS). This move was too small to translate into a move in Snr/Main index RV. The latter is made unattractive by the low perceived political/sovereign risk in Europe and the future inclusion of non-preferred senior CDS in the index. In other asset classes, the Pound was the worst performing G10, and cable 3-month implied broke above 10. 10y Gilt yield lost -2.5bp compared to Bund. In equities, the more international FTSE 100 (+2.4%) outperformed the more UK-focus basket FTSE 250 (+1.5%).