Apart from that, how was your weekend?

Monday 27th June 2016

  

Apart from that, how was your weekend?

Some thoughts on a Monday, ref :-  All Outlets , Everywhere

Tearful Remain voters will inescapably be reminded of the old line: "Apart from that, Mrs Lincoln, how did you enjoy the play?" , but nearly 52% of those that cast their vote did so for Brexit, so it follows that a majority will be pretty happy about recent events. It's just that scenes of jubilation are not readily apparent this morning, and the way forward looks fraught danger. Vicious market reactions testify to fact that this result was unexpected, so just how did we get here?

Where to start? Probably by holding one's hands up .... whatever anyone else might have got up to, we spent much of our weekend eating significant amounts of crow. It's of little comfort that many others were in the same boat, and we must apologise if somehow we gave the impression that the bookmakers were the most reliable guide to the likely outcome of the Brexit vote. What we MEANT to say of course was that bookmakers are as unreliable in these matters as anybody else and that you should have little faith in the result implied by the oddsmakers. Did we fail to make that clear?

It's not the first time we've had cause to curse bookmakers by any means, although other occasions may have centred on events less crucial to the fate of both UK inc. , and of the global economy as a whole. At least by the time voting started, opinion polls had also swung convincingly towards the Remain side. Crucially, so too had the majority of those in the markets. It's no exaggeration to say that on balance the markets were hugely underprepared for a Leave decision .... a couple of hours after the polls closed Sterling / US dollar was trading up to 1.50. It's back down to below 1.32  (a 31- year low)as we write with some calling for 1.20 .

How did they get it so wrong? The answer may be in the breakdown of voting patterns within England and Wales (we'll leave pro-Remain Scotland and N. Ireland to one side as their votes were pretty much taken as read). Mostly although certainly not exclusively, market commentators were confident that their fears of the damage done by a Leave vote would be reflected by the electorate as a whole. But even commentators in the UK able to look beyond the views expressed by the narrow demographic of those in the markets are still cocooned by a pro-Remain London bubble that, as it turns out, is distinctly unrepresentative of the electorate as a whole.

You could argue that it was precisely that sort of complacent self-regard on behalf on politicians and institutions that many of the Leave camp were voting against. If that's true, then by definition we can say that its populist, anti-status quo sentiment is similar to that more obviously being expressed by political movements the world over, and in particular within Europe. That won't make EU leaders too happy, and may well encourage some of them to strike a punitive stance against the UK in order to, if you'll forgive the misquote, "decourager les autres".

It's been a very odd few days, atmosphere-wise. It's relatively easy to spot a Remain voter, though not all have gone the whole hog in donning sackcloth and ashes. Some are demanding a second referendum. We know that referenda are not legally binding but they may need a better reason to call for one than "We didn't like the result of the first one". "Remainders" as a group look a little shell-shocked, but more interestingly so do many of those who wanted out. If, after such a decision  so momentous for Britain and beyond, nerves are making a few question what exactly they've done, that would be totally understandable. What is a lot more disconcerting is that their leaders seem to be in a similar position.

So where are we now, and where are we going? Politically. it's an utter shambles ..... PM David Cameron is off, but not until October. The serious negotiations regarding the UK's exit will not start until the new leader (and therefore Prime Minister) is selected by Tory MPs at that time, something else that most European leaders will be most unhappy (and therefore unhelpful) about. Favourite to become the new leader is a Boris Johnson who has so far lacked his usual and expected ebullience in victory and epitomised someone having second thoughts. His article this morning in the Daily Telegraph which seems to call for continuing close relationships with Europe on all matters except those that don't suit him has been criticized as being completely unrealistic. The problem is that the leave camp, having achieved their goal in the referendum, don't seem to have any viable strategy as to what to do next.

Presumably, the new PM would avoid making the same mistake as Gordon Brown (i.e. not getting his elevation to the top job ratified by a general election), which theoretically brings the other parties into consideration. Almost unbelievably, the main opposition Labour Party is in just as bad shape as the Tories with shadow cabinet ministers and senior MPs resigning by the dozen as a show of no confidence in their left-wing leader Jeremy Corbyn, who was so underwhelming in his supposed support of the Remain campaign. Quite what Britain might look like after an election in these circumstances is anybody's guess  .... it is, as we say, a shambles and this uncertainty could be devastating in a situation which would be difficult enough even with a solid ruling government.

And the markets? As we've heard, Sterling is getting hammered. The FTSE 100 is showing some resilience in retreat though bank shares continue to be pummelled. Government bond yields are also marked yet lower (and prices higher) on the back of their role as a safe-haven. UK 10yr Gilt yields are as low as 0.94% despite events signalling downgrades for the UK from the ratings agencies. We do wonder if Gilt yields will at some point begin to reflect the inflationary concerns inherent in a tumbling currency, but no sign of it so far. Markets do tend to overreact as we often point out, but on this occasion that may not prove to be the case. Beyond the political vacuum (never was the phrase more appropriate), traders may begin to focus on the possible long-term effects of business relocation and subsequent loss of tax revenue. That would just add to the pressure on all markets, including Gilts.

The UK is in desperate need of some firm leadership, and soon.... before things get really nasty. Or has that ship already sailed?