"Times They Are A-Changin' " , even if Britain declines to ......

Wednesday 22nd June 2016

 "Times They Are A-Changin' " , even if Britain declines to ......

ref :- "New normal dawns if the UK votes to remain" , The Financial Times, Analysis / Capital Markets, Markets and Investing

With the pollsters and politicians telling us that tomorrow's Brexit referendum is still wide open, at least we can be sure of one thing .... the sun WILL rise on Friday morning, even if for those most affected by the vote it's likely to be in that watery, obscured and very British way. For the purposes of ruminating on what might be in store once the referendum is done and dusted the FT takes the scenario most favoured by the bookies, but in the interest of even-handedness it's only fair to point out that such a scenario makes some fairly sizeable assumptions ;

    that the "Remain" camp will win

    If they do, that they will win by a big enough number to put this issue to bed, at least for a while

    that the ruling Tory party will not tear itself apart and open an electoral door to a Labour party whose far-left         leadership was previously thought unelectable

Anyway, should these assumptions prove accurate, will things revert to something like they were a year ago when the Tories had just secured re-election and Britain was just starting out on what's been a very long (oh, so very long) route to its EU vote ? The short answer looks to be "No"  --  Brexit or no Brexit, things just ain't what they used to be.

Back then, Sterling / Dollar was traded around $1.59, the FTSE 100 was above 7,000 and 10yr Gilts yielded 2.20% . Now, the respective values are respectively $1.47, 6,200 and 1.26%.

GBP / USD is the most obvious and most immediately reactive of sterling asset markets, and we have already seen a near 5% rise in its value as the odds (and some polls) have moved in favour of a "Remain" victory. It is running into considerable resistance around this $1.47 level and it's possible that we are at or near the top until a "Remain" vote is confirmed. If that takes place, one might expect a wave of sterling buying as a knee-jerk reaction but 12 cents worth ? Mmm ...

It's a similar story with the FTSE ..... No doubt it will be marked sharply higher but how much higher and for how long is anyone's guess. Once all the referendum noise has quietened down we'll all be back to looking at fundamentals, both for the UK and globally, and the world is a very different place to one year ago. In the UK, the economic data that suggested that Britain was roughly on the same upward path as the US and some way ahead of the Eurozone has given way to evidence of much weaker growth and anything but plain sailing ahead.

Some take the view that poor recent performance is a function of the uncertainty created by the Brexit vote, and that the removal of that uncertainty will restore confidence and growth  -- to such a degree in fact that they believe a November rate rise is likely in the UK. It would be fair to say that most do not share that view. Their argument is that irrespective of the referendum, the UK faces some fundamental economic challenges that should counter any urge to chase runaway sterling asset markets.

Talk of rates brings us back to the third element of the scenario we were looking at :  Gilt yields. Unless you're an ultimate optimist. it's very hard to make a case for a rise in rates given the soft data. This is not just a UK phenomenon of course .... yields on bonds (as opposed to prices) in Japan and Europe have collapsed to zero and below as authorities try to fight poor growth and to boost inflation with ever-easier monetary policy. The kind of yields seen a year ago now look fanciful.

It is quite likely that Gilt yields might rise short-term (and prices fall) as a Remain vote would remove some of the attraction of Gilts (and other government bonds) as safe-haven investments. Be that as it may, make no mistake there's no shortage of political risks to take Brexit's place : Sunday's Spanish general election and the possibility of internecine warfare in the UK's Tory party, to name but two. And what about concern over the growing prospects for populist politicians in elections in France and Germany next year ?  Or for those in the US this year, come to that ?

The removal of Brexit makes it more likely that the Bank of Japan will resume its monetary easing path at the next opportunity, not less. One could argue that it also removes an obstacle to the US Fed raising rates, but the global environment is not currently one that would encourage hopes of rate hikes in the UK or almost anywhere else, for that matter. For that to happen, we'll need the most fundamental of economic indicators : a sustained pick-up in price and wage inflation. For a lead on that, as ever eyes will be on the States. Not everything changes after all, it seems....