Pound set for small weekly gain; FTSE remains sub 7000

Once more It’s been a week dominated by Brexit chatter, but if you look through the noise as the dust starts to settle, on the whole not too much has changed. The pound is higher on the week but only marginally so and while the FTSE is on course for a weekly close below 7000 for only the 3rd time this year, the declines have been relatively small and measured.

Bigger fish to fry

Amongst all the positivity surrounding yesterday’s headlines there remains some skepticism, particularly regarding the fishing industry and Gibraltar post-Brexit. While the EU lending their support to Theresa May’s latest deal made plenty of headlines, if truth be told this was always likely to be the case and the bigger issue remains whether the PM can get the bill through parliament. The arithmetic to get the requisite support in the Commons remains challenging but having said that, it does seem to have at least a fighting chance.

One theory which is gaining traction of late is to pursue a similar path to that used in the US to get the Troubled Asset Relief Programme (TARP) through Congress back in 2008. The initial bill was rejected by 228 votes to 205, meaning the $700b fund to essentially bailout the banks was voted down. This caused an ugly reaction in the markets with the Dow Jones plunging 7%, which in turn raised fears of a deeper crisis and saw support for the programme grow. It was subsequently passed not long after. Proponents of this approach believe that if May’s deal is rejected and the pound drops sharply, then this could cause those who voted against it to reconsider and ultimately switch sides and pass the bill.     

Pound algos misread headline?

A closer look at the moves in the Pound yesterday provides some interesting insights and reveal just how sensitive the market is at present to news regarding Brexit. The initial move higher is easily explained as the upbeat comments from Brussels caused traders to rush in to buy the pound, causing a rally of around 1% in just 20 minutes, but what happened after is of more interest - at least from a cause and effect point of view. Just under 1 and a half hours after this run higher there was a sharp and rapid plunge in the market which saw the entire gain momentarily wiped out in a matter of seconds.

The Pound dropped rapidly on the “pulls out of” headline before recovering in just a matter of seconds. This could well be an example of a news-scanning algorithm gone wrong. Source: xStation

While some attributed the plunge to a closer inspection of the deal revealing problems remain (specifically relating to Gibraltar and the fishing industry), it seems more probable to have been caused by either a fat finger, or even more likely by a news-scanning algorithm.The swift reversal of the drop further suggests that this was a mistake. The drop coincided almost exactly with the moment This Morning presenter Phillip Schofield announced that PM Theresa May would not be appearing on the show.

Now while the programme is widely admired and liked, it seems highly improbable that the cancellation of May’s appearance would cause a flush in the pound and rather it appears to be a good example of a news-scanning automated trading programme gone wrong - the PM actually cancelled the appearance to hold a conference call with her cabinet to discuss the latest news out of the EU, so the cancellation itself wasn’t negative. The wording on the news wires here is the key with the headline “Theresa May pulls out of This Morning appearance” possibly the trigger, as the phrase “pulls out” is certainly one that could be used to programme a trigger to initiate a sell order.