Weekly Market Outlook

Move Over Donald Trump, Brexit Is the New Brexit

The event no one wanted to price in ahead of time, still isn’t priced in after the fact.

The Italian referendum is the new Brexit. Donald Trump is the new Brexit.

If a week that’s produced a proliferation of these analogies has taught us anything, it’s that Brexit itself may be the new Brexit, as the pound’s slump to new record lows shows that markets still haven’t properly digested the event that’s otherwise become shorthand for dramatic market readjustments.

This morning’s flash crash is generating headlines, but the pound’s recent decline is about much more than a bunch of algorithms taking advantage of thin overnight trading volumes. Most of the erosion in currency’s value this week happened after headlines from the Conservative Party’s annual conference showed the ruling party is serious about severing ties with the European Union — and soon.

That means that even the Leave vote which sent markets into a tailspin  — and which keeps cropping up in notes from analysts at banks from Credit Suisse to BNP Paribas SA as a warning that traders should prepare for foreseeable events — may not be fully priced in. This week has been the second-worst for the pound since the financial crisis — second only to the week after the vote itself — and all that politicians have said is that they really mean it.

The irony’s not lost on BlackRock’s Chief Macro Strategist Rupert Harrison, who was until recently an aide to former U.K. Chancellor of the Exchequer George Osborne, one of the high-profile “Remain”-inclined cabinet ministers to be demoted in the wake of that vote. Harrison says there’s a lot of reluctance in financial markets to acknowledge that the U.K. isn’t just heading for a Brexit, but “quite a hard Brexit.”

“It’s quite interesting that as that becomes more and more public, and we’re seeing that this week, the market response to that has been quite negative,” he said during a panel at the Institute of International Finance in Washington, D.C. on Thursday. “And I think that suggests to me, there’s quite a lot of naviety and optimism” that is getting “squeezed out” of the system, he added.

This leads to staggered legs of weakness in the pound linked to political affirmations of intent, like Prime Minister Theresa May’s newly-announced timetable for European Union withdrawal, which helped send the currency beyond lows registered in immediate aftermath of June 23 vote.

Trader confusion does reflect the dissonant views shown by officials in the upper echelons of the U.K. government: on the panel following Harrison’s, Tory Member of the European Parliament Kay Swinburne tried to downplay some of the hard-line Brexit commentary, saying the remarks were “primarily aimed” at the party faithful rather than the E.U. negotiators. A raft of other legal questions still hang over the potential exit as well.

Still, Theresa May has said Brexit has got to mean Brexit, so the trouble for the pound may not be over. “While the real effective exchange rate is already just 3-4 percent from the all-time lows, the negatives for GBP in terms of twin/triple deficits are well rehearsed,” writes Jeremy Hale, head of macro strategy at Citigroup Inc., rounding out a suite of notes from the bank suggesting more pound weakness is in the offing. “With U.K. services net export strength at risk from loss of E.U. market access, all the more so.”