Having filtered out much of the Brexit political turbulence in recent weeks, Thursday proved a chastening experience as investors started to at least price in a higher risk that the deal prime Minister Theresa May had hailed outside Downing Street less than 24 hours earlier would fail to make it through parliament.
The pound tumbled almost 2 percent against the dollar for its biggest decline in two years while sliding 1.9 percent against the euro. With investors taking shelter in the gilt market, where the yield on the benchmark 10-year bond dived 13 basis points, a much steeper climb than any other developed bond market.
The tumult of the day was a shock given UK market had spent recent weeks following, rather than reacting to, the Brexit negotiations, but the falls did not drive markets to new lows. Even after Thursday’s slide, the pound is nevertheless almost precisely in the midst of its trading range this year against the Euro.
Thursday’s sell-off, however, may even prove something of a game-changer if it opens the door too much greater Brexit-driven volatility. For investors accustomed to analysing economic data and corporate cash flows, the seeming political impasse appears to throw up a range of outcomes, including a possible second referendum or indeed a general election.
Brexiters opposed to the deal have to determine how much pressure they can put Theresa May under without triggering either outcome or what the impact of a leadership challenge would be.
The challenge in trying to calculate the Brexit risks -and then assessing whether they are priced into UK assets has inclined many investors to steer clear.
Sterling, in particular, has been problematic for investors to trade. Some funds have avoided taking large positions, in the knowledge that the trade is more about predicting a political outcome than crunching technical or economic data.