### POV: MARKETS DON'T BELIEVE NEW UK......>

STERLING: ### POV: MARKETS DON'T BELIEVE NEW UK CABINET WILL HERALD BREXIT

BREAKTHROUGH

-With arch-Brexiteers Johnson and Davis out of cabinet, some have speculated

this may provide the PM with a firmer hand on Brexit as the fresh faces in

government unify behind her vision of Brexit. Markets don't believe this to be

the case: implied vol of GBP/USD puts rose sharply following Johnson's

resignation, resulting in the risk reversals curve shifting materially lower for

maturities from overnight all the way out to the nine-month sector of the curve.

-Today 1m risk reversals equalled the lows of 2018, making GBP/USD puts their

most in demand relative to calls since last year's election, which resulted in a

hung parliament and a 2.5% drop in spot.

-Changes in options pricing provide a damning indictment of May's new cabinet as

hedgers fear the rising possibility of a no confidence vote, a leadership

challenge against May and, in an extreme scenario, a Corbyn government.

Nonetheless, GBP butterflies out to 6m have barely budged, indicating that while

GBP weakening is being seen as more likely, a market rout isn't widely expected.