UK Political Risk: Points to a May Summer Exit

Join our Larry McDonald on CNBC’s Trading Nation, Wednesday at 3:05pm ET

Pick up our latest report here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here

Resignations in May’s Cabinet will Topple Government in Our View

This weekend was punctuated by news of major resignations from within British Prime Minister Theresa May’s cabinet by Secretary of State David Davis and Foreign Secretary Boris Johnson. These came in response to Friday’s controversial “Chequers Agreement,” which many pro-Brexit figures saw as a betrayal and an arrangement that kept the UK far too close to the EU and its regulatory power.

Bearish Bets on the Pound Mounting
Net shorts are piling in, bets against Sterling on the rise.

Elections in the Offing?

This strong rebuke from two high-profile members of the “Leave” camp demonstrates in the strongest possible manner a continued dissatisfaction amongst more hard-line Conservative MP’s on the Prime Minister’s handling of Brexit. We believe this also foreshadows a “no confidence” vote within the next three months, the removal of Theresa May from office, and potentially a new round of General Elections.

Theresa May Exit Date Odds:
Betfair: 1/1 (by Sep. 2018)
SkyBet: 10/11 (by end 2018)
Ladbrokes: 4/6 (by end 2018)
Coral: 4/6 (by end 2018)
$markets: 5/6 (by end 2018)

“The betting on her exit date has moved very sharply from a 26% chance on Betfair [Sunday] morning that she’d be out this year to a 55% chance now [on Monday].”

UK General Election in 2018 Odds:
Betfair: 6/4
SkyBet: 13/8
Ladbrokes: 7/4
Coral: 7/4
$markets: 23/10

Pound Breaks its Recent Trend
We take a negative view on the GBP and UK Equity for the next six months. The Pound (GBP) has taken a significant hit recently on the back of uncertainty regarding the status of negotiations on the EU-UK post-Brexit agreement. The increased risk of a domestic government meltdown and a May exit will only serve to further compound this bearish trend.

No Confidence

A “no confidence” vote in the House of Commons from May’s own Conservative MP’s will have a substantial market impact, as it would hint toward a “harder,” more pro-Brexit successor. Such a person would almost certainly be more opposed to the UK remaining in the EU common market, causing even greater upset to the UK market due to greater trade worries.

If the Conservative Party (Tories) is unable to agree on a pick for Prime Minister following a successful “no confidence” vote, general elections will follow. We determine that the risk of a Labour victory will weigh on UK Equities and the Pound in such a scenario, as a government under big-government, high-tax Labour leader Jeremy Corbyn would prove unfavorable for markets. Such a scenario could also imperil the current state of affairs when it comes to Brexit negotiations, with substantial market impact.

Pick up our latest report here:

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here