OPTIONS: Larger FX Option Pipeline

Deputy Prime Minister and Secretary of State for Housing, Communities and Local Government Angela Rayner faces a political reckoning after confirming her underpayment of stamp duty on a flat in Hove in May 2025. Rayner has referred herself to the independent adviser on ministerial standards, Laurie Magnus, who will now investigate her claims of mitigation around the issue. This will ensure her position in the short-term at least, but leaves her vulnerable to potentially being forced to resign if significant malfeasance is found. 

• PM Sir Keir Starmer offered his backing to Rayner in prime minister's questions a short time ago, saying he was "proud" to sit alongside her. Given the substantial pressure Starmer's centre-left Labour gov't is under from the populist right-wing Reform UK in opinion polling, a ministerial scandal comes at the wrong time.
• The scandal is unlikely to have any notable market impact in the short term. If the inquiry results in Rayner's resignation, it would severely dent her prospects of eventualyl taking over as Labour leader. With Starmer's approval ratings falling, speculation has already risen that he could be replaced before the next election. Rayner, from the soft left/left of the party and Health Secretary Wes Streeting, a centrist, were viewed as favourites, with Rayner having the edge due to the Labour party grassroots leftward tilt helping her in any leadership election. Today's revelations may change this arithmetic. 

BMO suggest that “expectations for the Budget are so gloomy there is scope for upside surprises”.

• They believe that “market rates have done no more than go back to where they should be. Having reached our targets, the 10-Year yield is back at the top of its YTD range, and the forward strip now discounts a much more reasonable terminal rate for Bank Rate of 3.75%-4.0%”.
• BMO write “the UK does not face problems as worrying as many international peers. For all the fretting, consensus GDP forecasts are 1-1.5% for the next 3 years, stocks are +12% YTD and GBP is near the top of its post-Brexit range”.
• What’s more, they believe that many gilt-bearish triggers present offsetting bullish possibilities:
• Ultimately BMO suggest that “there is now a lot of bad news in the price”. They now recommend “returning to neutral in 2y2y and in 10y yields. 10s30s still looks too flat on an international comparison vs the “overhang” of long-term debt, but the BoE could effectively reduce the overhang at its September meeting, so we would not want to be in a steepener in the run-up to that”.

• In the FI space, Bund futures have traded lower this week. The move down undermines a recent bullish theme and the move down exposes support at 128.64, the Aug 15 low and a bear trigger. A break of this level would confirm a resumption of the downtrend and highlight a range breakout - the contract has traded in a range since April. This would open 128.40 next, the Apr 9 low. Key short-term resistance is at 129.90, the Aug 28 high.
• A bear cycle in Gilt futures remains in play and fresh cycle lows this week, reinforce current conditions. The continuation of the bear leg has resulted in a break of the 90.00 handle. Clearance of this level strengthens the downtrend. Sights are on 89.22 next, a 1.618 projection of the Aug 21 - 27 - 28 price swing. Initial firm resistance is at 90.84, the Aug 28 and 29 high. Gains are considered corrective and are allowing an oversold condition to unwind.