Brexit talks: Hedge funds warn of extreme volatility amid risk of “accidental” No Deal

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London-based hedge funds are warning of renewed market uncertainty, a less bullish stance on the pound and “extreme volatility” in the coming days, after EU Commission president Ursula von der Leyen and UK prime minister Boris Johnson agreed to further extend Brexit negotiations – with the risk of an “accidental” No Deal exit still remaining live.

Sterling rebounded on Monday morning after both parties agreed to continue talks following a weekend of downbeat assessments on the prospect of a formal trade agreement.

But Ayush Ansal, chief investment officer at the London-based quantitative long/short equity fund Crimson Black Capital, said any resolution may ultimately prove a “sticking plaster” deal aimed at buying more time into next year.

Ansal believes the nature of the UK’s departure from the bloc has essentially been decided “in spirit, if not in ink”, and warned the coming days are “likely to be defined by extreme volatility”.

“Even if, de jure, there’s a trade deal, for many market watchers the de facto outcome, given the deep-running tensions between the two sides, will still be No Deal,” Ansal explained.

“Many will see any agreement arrived at at this late stage as a sticking plaster deal that simply buys time for the tangled web of sector-specific deals to be thrashed out during 2021 and beyond.”

BlueBay Asset Management, the London-based fixed income and credit-focused hedge fund manager, said a trade deal remains its base case scenario  but indicated that continued uncertainty is leading to a more cautious stance on the economy.

Mark Dowding, BlueBay’s chief investment officer, pointed to the risk of supply chain disruption, blockages at UK ports, and shortages in certain imported goods, and flagged food and medicine supplies as a key area of concern, particularly amid the ongoing coronavirus pandemic.

“This scenario would also be detrimental to eurozone prospects, even if the situation would not be nearly as acute,” he said in a note last week.

Dowding sounded hopes that policymakers could “find a way past their egos” to reach an agreement that would “benefit the many, not just the few”, adding that ongoing worries over the negotiations would weigh heavily over wider market sentiment.

“It is now concerning that time is quickly running out and although a ‘Deal’ remains our base case, an increase in uncertainty and rising risks of an accidental ‘No Deal’ have led us to reduce conviction with respect to the bullish view that we had previously maintained on the pound,” Dowding observed.

“Yet, the economic impact coming from this outcome is likely to still pale into significance compared to what has been seen as a result of the coronavirus. Moreover, if downside risks just translate to more central bank asset purchases, it is hard to see this shaking the prevailing sense of complacency.”