Brexit tail wags the dog

Financial Mirror (Cyprus) - - FRONT PAGE -

If any­one still doubted the claim ex­pressed here on May 25 that pol­i­tics is now driv­ing global fi­nan­cial mar­kets far more than eco­nomics, those doubts should have been dis­pelled by Mon­day’s trad­ing. From the mo­ment that cur­rency trad­ing started in the New Zealand morn­ing, through the Nikkei and Hang Seng open­ings in Asia, to the main forex busi­ness in Lon­don and fi­nally the stock mar­kets on Wall Street, the dom­i­nant trends all seemed to be con­nected with polling for Bri­tain’s EU ref­er­en­dum on Thurs­day, and spec­u­la­tion about what ad­di­tional news events might in­flu­ence the vote.

As it hap­pened, all the news since Fri­day’s close was favourable to the Re­main camp: first the neo-Nazi mad­man who on Thurs­day mur­dered Jo Cox, a pop­u­lar pro-Europe mem­ber of Par­lia­ment, de­cided to shout “death to traitors, free­dom for Bri­tain” at the judge in his first court hear­ing. Then, poll­sters de­tected a mod­est shift in favour of Re­main even in the sur­veys con­ducted be­fore the Cox as­sas­si­na­tion. Next, a col­lec­tive state­ment in sup­port of EU mem­ber­ship was is­sued by the Premier League foot­ball clubs. Fi­nally, late on Mon­day, Ge­orge Soros took over me­dia head­lines with a pow­er­ful warn­ing that ster­ling would col­lapse by -20% to -30% af­ter a Leave vote, re­sult­ing in the pound be­ing worth about one euro — “a method of join­ing the euro that no­body in Bri­tain would want.”

This full-scale es­ca­la­tion of the rhetor­i­cal tech­nique de­nounced as “Project Fear” by the Brexit camp seemed to be work­ing, at least in the mar­ket’s view. The pound ex­pe­ri­enced its biggest one-day gain since the end of the 2008 cri­sis; the Brexit odds in bet­ting mar­kets col­lapsed from 38% to 25%; and risk as­sets of all kinds, from eq­ui­ties to com­mod­ity prices, fol­lowed ster­ling higher all over the world. And Soros’s pre­dic­tion that the pound would ei­ther re­bound to above US$1.50 or slump to around US$1.15, de­pend­ing on the out­come of Thurs­day’s vote, ac­corded with the cal­cu­la­tions pre­sented here two months ago, and with the three-to-one ra­tio of Re­main-to-Leave prob­a­bil­i­ties shown in bet­ting mar­kets by Mon­day night.

There seem to be three pos­si­ble rea­sons for this tail-wags-the-dog mar­ket be­hav­iour, dis­cussed in sev­eral of our re­cent pieces. A first and ob­vi­ous ex­pla­na­tion for the sud­den im­por­tance at­tached to Bri­tish pol­i­tics by all global mar­kets is the pos­si­bil­ity that a vote to leave the EU by Bri­tain would trig­ger a chain re­ac­tion, re­viv­ing the euro cri­sis, and pos­si­bly risk­ing en­tire EU.

A sec­ond ex­pla­na­tion is the risk of the fi­nan­cial cri­sis and re­ces­sion in Bri­tain pre­dicted by Soros turn­ing into a re­newed bank­ing cri­sis that spreads, as in 2008, to banks in other Euro­pean coun­tries and around the world. A third pos­si­ble rea­son is the po­lit­i­cal con­ta­gion ef­fect dis­cussed here last week: a Leave win in Bri­tain would in­crease the per­ceived odds of Don­ald Trump be­com­ing US Pres­i­dent and of anti­estab­lish­ment par­ties win­ning elec­tions in Italy, Ger­many or France in the com­ing months. What­ever the rights or wrongs of anti-elit­ist pol­i­tics and the griev­ances it may or may not re­flect, there can be lit­tle doubt about the pref­er­ence of fi­nan­cial mar­kets. Just as tur­keys don’t vote for Christ­mas, it is hard to see how anti-elit­ist pop­ulism could be wel­comed by fi­nan­cial mar­kets that are dom­i­nated by fi­nan­cial and busi­ness elites.

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