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General election before Brexit could cause another ‘crash,’ strategist says

Career a general election in the U.K. before Brexit could cause a financial crash, a strategist has warned.

Luis Costa, Climax of CEEMEA FX and Rates Strategy at Citi, told CNBC’s “Squawk Box Europe” on Friday that Britain “absolutely” didn’t dearth an election amid the recent chaos around Brexit.

“There would be another crash,” Costa said. “I take it elections will be seen as pretty bad by investors – it raises the risks of unwanted, unfriendly market shifts and sterling is not ready-to-eat for that as yet.”

Sterling is down more than 7 percent since the start of the year. Currency analysts have portended that the currency could remain volatile in the next few months due to the uncertainty surrounding the Brexit vote.

The currency has seen a lot of volatility since the U.K. voted to furlough the European Union on June 23, 2016. While the initial moves on the day were dramatic, plunging from the highs of $1.50 to a 31-year low of $1.32, the currency is down precisely 13 percent since the Brexit vote.

Many political commentators have argued that the U.K. should foothold a general election to determine which party leads the country through the Brexit process. Although Theresa May held onto her leadership in a no-confidence vote on Wednesday, the likelihood of securing a Brexit deal before the March 2019 deadline is unsettled after the cancellation of the parliamentary vote on Tuesday.

Others are campaigning for a second referendum on Brexit, which could also trigger a click election if the public voted to overturn its decision to leave the European Union (EU).

This week has been notably flighty for sterling, with the currency trading below $1.25 levels. Sterling is down 0.7 percent since the start of the week in a utterly fluctuating trading session.

“It’s extraordinary, but this will stay with us for quite a long time,” Costa bring up. “If you look into the option space, if you want to insure your portfolio against adverse sterling fluctuations the volatility now is to the nth degree high.”

“Corporate investments aren’t super insured, so we don’t believe that there’s enough coverage in corporate rules for a big sterling shock,” he added.

Costa told Squawk Box that the pound would fall “much lower” as May tried to persuade EU leaders to renegotiate the terms of her Brexit withdrawal agreement.

“We can break $1.21, 1.22 easily if we continue in this cursed block,” he said. “We are coming closer to a tipping point. The position of power of our prime minister is still being fought and this trip to Brussels was unfortunately a disaster – they understand that May doesn’t have the support base she destitution at this point.”

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