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(Repeats Monday's story with no changes to text)
Oct 14 (Reuters) - Sterling, British bank shares and even
German and Irish government bonds are some of financial prices
most sensitive to the ebb and flow of Brexit developments as the
long-running saga enters a crucial week.
The pound enjoyed its best week since 2017 last week after
British Prime Minister Boris Johnson and Irish counterpart Leo
Varadkar said they could see "a pathway" for an agreement for
Britain to leave the European Union by Oct. 31.
Some of that optimism has since ebbed as London and Brussels
still have widely differing positions, days before crucial Oct
17-18 talks.
While Brexit has cast a cloud over world markets since the
June 2016 referendum resulted in a narrow win for Leave, some
assets are particularly sensitive to headlines and will show an
outsized reaction, whatever the outcome of the talks.
Following is a graphical tour of just what's in play as the
Brexit endgame commences:
SILVER AND GILT
Sterling's exchange rate has been by far the most sensitive
price to Brexit newsflow. And once again last week, Brexit
optimism drove the biggest two-day pound rise in over 10 years
. A negotiated deal will likely send the pound into the
"low 1.30s", JPMorgan says. UBS Wealth Management expects a rise
to $1.35. Reuters polls predict sterling between
$1.27-$1.34 if a hard Brexit is avoided but a "worst case"
outcome of no deal will see it between $1.10 and $1.19, the
poll showed.
Two respondents predicted parity with the dollar.
Recent sterling gains rippled into derivatives markets, with
one-month risk reversals - a ratio of bullish to
bearish bets on sterling - flipping into positive territory for
the first time this year and indicating a washout of negative
bets. It's been positive only three times since the 2016 vote.
A sterling move up would also upend excessive 'short'
sterling bets on futures; Reuters calculations show net short
bets for the pound are still nearly double their historical
five-year average.
HOME AND ABROAD
Some of the biggest winners from a Brexit deal will be shares in
companies that earn their living from the UK economy. Unloved
for years, an index of such shares soared on Friday, rising more
than the blue-chip FTSE benchmark for the first time since May.
The index, compiled by JPMorgan and tracking about 30 stocks
that make all or most of their revenue in the UK,
soared almost 8% for its best day since the grouping was created
nearly three years ago. House builders such as Persimmon
and Barrett, as well as domestic banks Lloyds
and Royal Bank of Scotland, drove the rally.
Since May, the index has languished at a discount to the
FTSE-100 as fears grew of a disorderly EU exit that would
inflict huge damage on the British economy. The markdown widened
after Johnson took over as prime minister.
On Friday, though, the index outshone the internationally
focused FTSE 100 by 4.4% . To put Friday's moves into
context, RBS's 11% surge was the biggest move in either
direction since June 24, 2016, the day after the referendum.
MONEY MARKETS
A no-deal outcome would likely force the Bank of England to cut
interest rates to shore up the economy but last week's optimism
washed out money market bets on a rate cut in March. No cuts are
now expected until December and a Brexit deal may dampen that
possibility too.
An orderly Brexit would also reduce pressure on the European
Central Bank to cut interest rates and might also boost the
euro. Money market futures have trimmed chances of an ECB cut in
December to 20% from 40% early last week
BOND BULLS TAMED - OR NOT
Brexit clarity would go a long way to removing some of the
entrenched pessimism that has swept a whole swathe of the euro
zone government bond market into negative yield territory.
Brexit jitters have not only boosted demand for safe-haven
German or U.S. debt but also fuelled economic growth worries in
the bloc - the UK is Germany's fifth largest export destination.
No wonder then that bond yields in Germany - viewed as a
proxy for the euro area - have tracked sterling closely in
recent months. Goldman Sachs predicts a near-term Brexit
resolution could send British bond yields at least
20 basis points higher and push up German and U.S. Treasury
yields by 10bps and 5 bps respectively.
JPMorgan told clients its 'overweight' in euro zone debt
would benefit from any Sino-U.S. trade deal as well as from a
Brexit agreement.
WILL IRISH EYES BE SMILING?
No euro zone country has a higher stake in Brexit than Ireland.
Not only is Britain Ireland's largest trading partner but its
border with the British province of Northern Ireland has been
the thorniest issue in Brexit negotiations. A disorderly Brexit
risks a return to the violence that plagued border areas for
decades before 1998.
"One of the things you can observe is that when risks of no
-deal Brexit rise, Ireland tends to underperform," said Peter
Schaffrik, global macro strategist at RBC Capital Markets.
The government has pledged 1.2 billion euros to alleviate
the effects of a no-deal Brexit, allowing its budget to go into
deficit. No wonder then that Friday's positive Brexit noises
pushed ten-year government bond yields 10 bps lower. Its spread
over Germany - effectively the yield premium investors demand to
hold Irish debt - is at 144 bps, the tightest since late-July
.
Irish stocks likewise jumped 4% on Friday with bank shares
rising as much as 11%.
EASTERN EXPOSURE
Brexit will reverberate in eastern Europe too. With 900,000
nationals living in the UK, Poles are Britain's biggest
immigrant group, sending home a billion euros a year in
remittances. Britain is also Poland's second-biggest export
market; Warsaw runs an annual trade surplus with the UK of just
over 8 billion euros.
No wonder the zloty plunged as much as 4.7% against the euro
and 9 per cent against the dollar on the day after the
referendum.
Hungary and the Czech Republic are exposed to British demand
for vehicles, with 0.2% and 0.35 of their respective GDP linked
to 'value added' exports to the UK, ING Bank calculated late
last year.
The longer-term threat is what Brexit means for the 2021-27
EU budget. Britain contributes around 6 percent of the budget
and its departure will see average EU GDP per capita levels
decline. That will push incomes in Poland, the Czech Republic
and Hungary above the EU average and may spell cuts to their
funding.
(Reporting by Saikat Chatterjee, Dhara Ranasinghe, Josephine
Mason, Marc Jones and Thyagaraju Adinarayan; compiled by Sujata
Rao)
