Developments and scenarios ahead: The Brexit-related news flow since the UK/EU agreement on 25 November 2018 has been quite intense. In our view, it has slightly increased the probability that the UK remains in the EU beyond March 2019, thus prolonging the uncertainty over how (and even whether) Brexit will happen. Nonetheless, our most likely scenario remains that the Brexit deadline arrives with a ratified deal (60% probability).

Note that this probability covers deals other than the recent UK/EU agreement (as long as they lead to a transition period during which the UK will still be part of the European Single Market) and potentially very rocky paths to deal ratification, which would only come after major episodes of uncertainty and stress.

Investment views: Regarding the markets, at the moment, they continue to price in some sort of weak muddle-through scenario. As uncertainties around Brexit outcomes remain high, sterling will likely continue to be under pressure, with some downside risks remaining (especially vs the Japanese yen), given the increasing probability of no deal. We would return to a more neutral view in a phase of excessive market pessimism.

In fixed income, our view on duration is around neutrality, given two contradictory forces in play: the excessive valuation regarding 10-year real yields (now at -2.15%); and the downward revision of economic growth prospects leading to more a dovish Bank of England. We believe that current market volatility creates opportunities for active managers, but all positions have to be managed actively and even reversed could more positive developments appear regarding the Brexit situation.

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