Why markets are suddenly terrified that Britain is heading for No Deal Brexit
The truth is dawning on the markets that, with Boris Johnson as prime minister, we are heading for a No Deal Brexit whether we like it or not.
Boris Johnson is not even officially prime minister yet, but already he is ramping up the No Deal rhetoric.
He dismisses any changes to the backstop, saying: "the problem is very fundamental. It has been devised by our own country as an instrument of our incarceration";
It's been leaked that the Brexit secretary went to Brussels to tell them that Theresa May's deal was dead five times over in case they didn't quite hear it;
It's also been leaked that his team are considering plans to suspend Parliament for two weeks by organising the Queen's Speech for early November.
This pro-Brexiteer language should come as no surprise, as he needs to seal the deal with the Conservative membership with as big a margin as possible in order to ensure he moves into Number Ten next Monday.
But he didn't need to go in quite this hard at quite this moment. Is it just over-excitement from the Brexiteers now that they're closer to the levers of power?
Or is it part of a bigger plan to talk tough now, in order to ensure that any later climbdowns demonstrate to Brexiteers that he tried hard, but it wouldn't work?
Or just to allow all parties to compromise at the last minute, but forcing more from Ireland/EU and thus emerging as #winning #bigly?
The real motivation behind Boris Johnson's tough talk on Brexit
Johnson is clever, that's for sure. We think the explanation is clearer than all of this.
Provoking opposition allows you to see the whites of your opponents' eyes. What do they really want and what are they prepared to sacrifice to achieve it? It focuses attention on their inability to agree on anything to stop you (note that arch-Remainer and legal guru Dominic Grieve has admitted that it's almost impossible to stop No Deal).
Johnson doesn't need a plan at this point. He just needs to smoke out what he's dealing with. With everyone then revealing their hands, he can set it up so that they wear the blame for whatever happens.
If Brexit is stopped, it's because others took that decision out of his hands. If Brexit isn't stopped, and we tip into No Deal, it's because others wouldn't compromise, taking the decision out of his hands.
By taking a tough consistent line, the blame will land elsewhere.
No surprise then, that The Times leads with a report that "Team Boris" plans to hold an election before summer next year, "while Jeremy Corbyn is still around". And if Johnson is forced into one before then? Well, then that's everyone else's fault for bringing a vote of no confidence in him.
The entire Brexit process has been hallmarked by the sheer unwillingness or capability of anyone to lead it. We have been astonished by no-one stepping into this vacuum of power. But why would they, with the country divided down the middle? That's lose-lose for any politician.
How to step in and emerge victorious? Let the stalemate move the process inexorably along to exiting the EU, while looking like you tried everything to manage it properly. With 50% of the population angry whatever happens, it's vital that the blame falls somewhere else.
"Teflon Tony" becomes "Bacofoil Boris"
Get your tinfoil hats ready, as it appears the market is yet again only just coming around to the idea that it's very possible we slide towards No Deal. Not only possible, but pre-programmed by the politicians.
In summertime markets, we are much more likely to hit those pockets of short gamma (this is where investors bet too heavily that prices won't change much, leaving banks vulnerable if events shift prices significantly). That's what took a slug out of sterling yesterday.
See how three-month GBP/USD volatility has been heading higher as the spot price triggers through psychological big figures:
That doesn't usually happen as you head into the quietest period of the year, not least when volatility is collapsing everywhere now that stocks can keep going higher on those promised Federal Reserve rate cuts.
Someone has to cover their position and will find it hard to do so as liquidity disappears. We expect sterling can fall even further, even quicker from here, with volatility rising as it does so.
And all because the truth is dawning. We are headed to No Deal and we are about to get a new prime minister with an entirely new way of managing the process. Sure, he might fold in the end. But equally likely, he might not. He will simply take up his position, "We are out, do or die", and see what everyone scurries around to do to stop him.