It's just Brexit, Brexit, Brexit ..... oh, and Spain .....

Monday 20th June 2016

It's just Brexit, Brexit, Brexit ..... oh, and Spain .....

ref :- " Pound Surges Most Since 2008 as "Remain" Regains Lead in Polls " , Bloomberg Markets

ref :- " Marxist economist makes bid for power in Spain " , The Financial Times

There's no getting away from it, and much as we've tried over recent weeks and months, that's fair enough. The big day (that's Thursday, just in case you were in any doubt) is nearly upon us and there has been a notable shift in momentum back in favour of the "Remain" camp over the weekend.

So, from a market point of view, that means a jump a the value of sterling (the biggest upward move for nearly eight years versus the dollar), and support for the euro against most currencies  --  except sterling, obviously. Global stock markets are happy with developments too, though government bond prices are lower (and yields higher) reflecting reduced appetite for these safe-haven investments after the latest polls. Slightly counter-intuitively this also includes UK Gilts, which are behaving like safe-haven assets rather than specifically UK ones. The other markets suffering from reduced levels of anxiety are, as you might expect, the traditional safe-havens  : Gold, Japanese Yen, US Dollar .... ***

*** In market parlance, you could say we have moved from a "risk-off" situation, where investors might seek to avoid the dangers of higher-yielding, riskier investments and instead look to safe-havens, to a "risk-on" environment where investors will consider more risk to achieve better returns. "Risk-on / Risk--off (RoRo) behaviour began to occur more frequently and in greater volume after the financial crisis of 2008/9. Roro can cause investors to behave in a herd-like manner depending on the risk environment. This investor behaviour is more likely to occur in times of economic uncertainty." , The FT Lexicon.

The most recent poll showing a 45% - 42%  reading in favour of "Remain" appeared in the Daily Mail, an organ not often willingly associated with pro-European leanings. Undoubtedly, the Remain campaign received a good injection of support as a reaction to the tragic murder of pro-European MP Jo Cox. We suppose that hard-hearted investors will have to ask whether this support is of the knee-jerk variety or to be relied upon, but either way it seems to us that the poll may be a lot more reflective of where things are really at than many earlier attempts. It seems to us that the views of 45 million or so eligible voters are unlikely to be fully represented by an online poll of  900 online respondents for example, as we saw last week, but we mustn't get started on that one or we'll be calling for the prosecution of pollsters for misleading the public.

Suffice to say, depending on their methodology polls can be dangerous so be very careful over the next few days, and you would almost certainly do better to follow the bookmakers (see www.oddschecker.com) for an accurate pointer to the likely result. At this moment in time, the odds imply that the likelihood of a pro-Brexit vote is fractionally over 30%. But remember, even the polls are right in suggesting that there are many still undecided so anything is still possible.

It may get most of the coverage but don't think that Brexit is the only vote in town ..... Sunday 26th June sees a general election in Spain (yes, another one). Ever since the election of December last year, the main players of both left and right have been trying and failing to put together a coalition that could form a government. The FT focuses on Alberto Garzon, the young communist Republican leader of Izquierda Unida who in coalition with the bigger far-left Podemos party are looking set to win 25% of the electorate (those pesky polls again). Should they do so, they will displace the Socialists as the main party of the left and are likely to attempt to persuade them into a coalition to form a government.

Whether the Socialists would ever agree to such a union must be open to doubt, but under pressure they just might. Whatever the case, it does seem that we will witness more success for populist politicians in Europe. What does that mean, economically speaking ? The proponents of austerity have long held power where it matters in Europe, but if Spain joins the likes of Greece, Portugal and even Italy in seeking a more expansionist economic policy it may be only a matter of time before the perceived mistrust between North and South in Europe blows up into something more ugly.