Suddenly Brexit outlook is starting to look brighter in markets

Growing optimism that the UK is unlikely to exit the European Union without a deal reverberated through markets on Wednesday.

The pound rebounded from its weakest level in more than a year, while stocks of domestic homebuilders surged across the board. The FTSE 100 Index of stocks fell on concern a stronger pound will depress earnings of export-oriented companies, while gilts slid on speculation that avoiding a no-deal exit would prompt the Bank of England to raise borrowing costs sooner.

While Prime Minister Theresa May is still expected to lose a vote next week on her divorce agreement, Parliament’s vote late Tuesday giving lawmakers the potential to decide on Britain’s "plan B" has reduced the chances of the country crashing out of the EU in March, according to Investec Asset Management and MUFG.

"What is becoming clear to all is that this government is increasingly at the mercy of MPs in Parliament and given the overwhelming opposition to a 'no-deal' Brexit, the prospect of that has diminished further," said Derek Halpenny, MUFG’s European head of global market research. "Diminished prospects of a ‘no-deal’ Brexit will help limit the appetite for selling the pound aggressively."

The pound rallied 0.5% to $1.2777 after touching $1.2659 on Tuesday, the lowest level since June 2017. The premium to hold put options on sterling relative to calls for the next one week diminished to just 10 basis points from almost 50 basis points on Tuesday, suggesting investors are close to betting on further gains for the currency.

The yield on 10-year gilts rose five basis points to 1.33%. UK property developers that are sensitive to Brexit-related news climbed, led by a 7.2% gain in Berkeley Group, while the FTSE 100 Index fell 1%.

Lawmakers also forced the government to release its legal advice on Brexit on Wednesday. The defeats for May could either lead pro-Brexit lawmakers to decide the prime minister’s deal is better than no deal, or push Parliament to revoke the Brexit process and hold a second referendum, according to Investec portfolio manager Russell Silberston.

"It feels like the range of possible outcomes is shifting toward a more positive pound outlook," said Silberston, who has a long position on sterling.

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