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The Fear, The Fear…

10 September 2020 by jbchevrel

Another weak day for UK risk. UK financials CDS extend this week’s under-performance. UK domestic hold-co sub CDS have widened by between 20 and 30 bp over the past week, while peripheral sub CDS have been about unchanged over that period. As usual, GBP FX led the move. Gilts and sterling swaps rates feel already floored, not giving much of an insight. Short-end still consistent with a future -10bp BoE cut next year. -10bp is roughly where 2y Gilt and 1y1y OIS trade. Earlier this week, UK PM Boris Johnson had ordered the altering of the withdrawal agreement because he wants British ministers to have the right to interpret key parts of the Northern Ireland protocol. That prompted the resignation of the British government’s top lawyer earlier this week. The European Commission confirmed the plans violated the treaty, saying in an internal analysis paper that they amounted to a “clear breach of substantive provisions” of the protocol on Northern Ireland agreed as part of last year’s deal with Boris Johnson. Brussels also laid out options for pursuing Britain if it presses ahead, including hauling the country before the ECJ or initiating a dispute-settlement process. Either could result in fines for the UK. Johnson has also been criticised by Tory MPs and prominent figures (Ex PM Major added his voice to criticism). Today, talks between Maros Sefcovic (European Commission vice-president) and Michael Gove (UK Cabinet Office minister) didn’t produce much. Barnier wanted to sound open but made it clear the override was unacceptable. This override could even harm the US/UK ‘special’ relationship. Top US Democrat Nancy Pelosi said that there is “absolutely no chance” of a US-UK trade deal passing through Congress if the Good Friday Agreement is undermined. One of Joe Biden’s top advisers, Antony Blinken, said on Twitter that Mr Biden was also “committed to preserving the hard-earned peace and stability in Northern Ireland.” This saga for UK CDS will continue next week. @bbclaurak twitted Frost confirmed talks will go ahead in Brussels, next week, despite this week's developments...