Okay, if we must ..... a little nod to Brexit

Wednesday 27th April 2016

  

Okay, if we must ..... a little nod to Brexit

ref :- "Sterling hits 10-week dollar peak as fears of Brexit abate", The Financial Times, Companies and Markets

There's a very good chance that anyone based in the UK will already sick and tired of the whole Brexit thing, and there's still almost two months to go until the referendum. We've tried to avoid spending too much time on it for the very purpose of avoiding Brexit-fatigue but as the FT Markets section leads on the subject and many others including the OECD seem to be having their say, a quick look is probably in order.

From a trading point of view, the issue has certainly been presenting opportunities. In general terms, a majority of economists both inside and outside Britain believe that Brexit would be A BAD THING for UK inc.  --  even the minority who vociferously take the other view would have to concede that particular statistic. Hence, and very simply, rising support for Brexit is viewed by the markets as bad for Sterling and Sterling assets (e.g. UK Gilts, but not necessarily equities), and fading support is bullish. So, when the polls were putting the two camps within a percentage point or two of each other, Sterling sunk to below 1.39 versus USD and below 1.24 versus the Euro.

Trading political risk is definitely not everybody's cup of tea, but had you had taken the view that ultimately the "Remain" supporters will win out  and consequently had bought the currency, current levels of 1.46 and 1.29 respectively would be showing you a nice little turn. Given the recent poor performance of pollsters, many prefer to be guided by bookmakers' odds (we know, it doesn't sound very scientific) and after President Obama's observation that a post-Brexit UK would be at the back of any trade queues, the probability of a vote to stay in is now being put at about 73%.

If it looks like things have swung the way of the Remain camp for now, don't be fooled into thinking that the pro-Brexiteers are anything like a busted flush. There's a long way to go in this saga, and so many are still undecided that either vote is still on the cards. So expect Sterling to stay extremely sensitive to movements in polls, and to high profile statements like the one made by Angel Gurria of the OECD this morning. His view on the prospects for Britain outside of Europe (GDP down 3% by 2020, 5% by 2030) is only fractionally less bearish than that offered by the Treasury the other day, and unsurprisingly it has infuriated the pro-Brexiteers. (It's only an impression and far be it from us to offer any advice, but it strikes us that they might be better off, strategically speaking that is, tackling the points made rather than automatically shouting "Conspiracy !")

UK data continues to disappoint : Q4 GDP down to 0.4% (from 0.6%), annualised 2.1%. Industrial Production minus 0.4%, Services down to 0.6% (from 0.8). The Remain camp blame the gloomier picture on the uncertainty and lack of investment brought about the very possibility of Brexit, which of course was also blamed for the slump in Sterling. But the UK's dire current account numbers and feeble manufacturing and exports would of course benefit from a weaker currency, and the irony is that if it pans out that the British public make the (supposedly) economy-friendly decision to Remain, they more than likely won't get it.

The whole Brexit debate revolves around so much more than the economic arguments, things like Sovereignty which thankfully are no part of our remit. Whilst some pro-Brexiteers argue that there would be no economic price to pay, others admit that there might be but that it's one that's worth paying. For one man's view on what that price may be, take a look at :

"Myths and fantasies in the case for Brexit" , by Martin Wolf, Comment  in the Financial Times

We of course are strictly impartial in all such matters. We sure that Mr Wolf would argue that politically he is too, and is just giving his take on the economic consequences for a Britain out of Europe. But Brexiteers should be warned .... they might find it pretty uncomfortable reading.