Never mind the dwindling no-deal odds and the almost desperate political optimism of recent days: For investors who remember the vortex that sucked in markets from Tokyo to Toronto three years ago, a hard Brexit remains a tail risk which is simply too big to ignore.

The hope is still that Britain can strike a divorce agreement with the European Union which preserves trade ties and averts the kind of global market crash that accompanied the 2016 U.K. referendum. But the political dramas since then underscore the uphill battle facing negotiators, especially given Prime Minister Boris Johnson’s precarious hold on power.

Among the low-probability but high-impact risks cited by investment banks and investors: Europe tipped into recession, a Scandinavian currency sell-off and a rout of emerging markets.

“A Halloween horror show could catch markets by surprise,” said Mark Dowding, the chief investment officer at BlueBay Asset Management in London. “A no-deal outcome would be highly disruptive and likely to have market impact which would potentially extend beyond Europe.”

Like most asset managers interviewed for this article, Dowding sees a no-deal exit by the end of this month as highly unlikely. After the two sides agreed on Friday to begin a more detailed phase of talks, betting odds of a no-deal scenario playing out at all this year dropped below 15%.

Yet Brexit has already been spurring a quiet kind of global contagion. Real-money foreign investors keep snubbing European stocks thanks in part to political risk in the region, including dramas emanating from the U.K.

“The rule of thumb that we have followed as global investors in the last three years has generally played out,” said Alessio de Longis, a New York-based multi-asset fund manager at Invesco. “The further you are away from Europe and U.K in terms of assets, the less the impact.”

The tentacles of U.K. markets are long: $2 trillion of its public and private debt was held overseas in 2018, according to data from Nomura International Plc. Nearly one-third of U.K. gilts are in the hands of non-domestic investors. And there’s more than $2.3 trillion of foreign claims on U.K. banks.

That doesn’t include the potential disruption in Britain’s $3.7 trillion a day interest-rate derivative market, nearly half of which is denominated in euros. While the clearing side has been ring-fenced, and many banks have contingency plans in place, it’s hard to completely rule out unintended consequences in complex markets.

“Both sides can prepare as much as they can, but with these things, it’s the unexpected that turns a bad situation into something worse,” said Jordan Rochester, a currency strategist at Nomura in London. “Day One of Brexit won’t necessarily have the worst-case scenarios played out. But over days and weeks, the impact starts to become very visible.”

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