Knee-jerk reactions may not stand up to more considered examination

Friday 4th November 2016

Knee-jerk reactions may not stand up to more considered examination

ref :- "May's Brexit calendar in turmoil ....." , The Financial Times and All media outlets

On the move today but couldn't let yesterday's action in London go by without jotting down some not very scientific thoughts on the High Court's ruling that the UK government should not be allowed to trigger Article 50 (formal notice of Brexit) without consulting parliament. The decision will be appealed, but in effect it means that whilst big majorities in both the House of Commons and the House of Lords will not necessarily block Brexit altogether, they will attempt to force a "softer" Brexit stance on the government that would entail less emphasis on curbs to movement of people, and more on the pursuit of remaining in the customs union and single market. As things now stand, Brexit minister David Davis said that an act of parliament would be required to invoke Article 50 and there's no chance of that happening in line with the current government position with the heavily pro-Remain bias in both Houses.

We'll leave the legal arguments about the precise terms of the European Communities Act 1972 to someone more qualified (which is just about anybody), but the market reaction (in GBP / USD, aka "Cable") is worth looking at. We know that it was helped by the Bank of England report that acknowledged stronger than expected growth and the likelihood of sharp rises in inflation, but the main impetus behind sterling's move from below 1.23 to almost 1.25 has been the High Court decision.

That's absolutely logical, of course. Even the most ardent Brexiteers would admit  that although it's a price worth paying in their eyes, the Brexit vote would inevitably bring about some short-term cost to the economy and reverses to sterling and sterling assets. Nor is it any surprise that the hard-line approach to Brexit adopted by PM Theresa May (immigration curbs over single market access) provoked another wave of selling for the pound. With that in mind, it should come as even less of a shock if any development that increases the chances of a "softer" Brexit (or even no Brexit ?) brings on a sharp bout of short-covering. An entirely natural reaction, and of course we "get" it  ..... but can't help thinking about the bigger picture.

The Remain camp repeatedly point out that the binary, YES/NO nature of the question posed by June's referendum was totally inadequate to address such a complicated issue. That's almost certainly true, but the fact remains that by a majority of 52% to 48% the UK did vote to quit the EU.  "Ah yes," they say ..... "but knowing what we now know about the economic effects of Brexit, if another referendum was held today then the result would be very different." We're not at all sure that that's the case.

There was a large swathe of voters who voted for Remain out of trepidation about what the economic consequences might be whilst still being sceptical about the future of the EU and of the nature of democracy within it (pragmatism over principle, you might call it ..... just WHO could these people be ?).  Anyway, the people decided differently and whatever they may have thought about the result, the obligation for all within the UK is to make the new scenario work. Many may have felt relieved that others had grasped the nettle for them, so to speak,  and to reverse an over-simplistic but undeniably democratic decision is not on their agenda.

The issue hides a deep and thoroughly realistic threat to the UK. The global move to populist politics has been fired by the perception that political and financial elites are acting for themselves whilst ignoring the views and welfare of the common man and woman, for want of a better expression. It's a story as old as politics itself.  Rightly or wrongly, many feel that these elites consider their opinions to be intrinsically worth more than those of others. This is EXTREMELY dangerous ground ..... history teaches us that kind of thinking ultimately elicits the strongest of responses. It's hard to imagine anything that would more personify what many would regard as an elite than the combination of politicians, financiers and industrialists that they would blame for moves to renege on the democratic decision of the nation. The fact that (leaving Scotland aside for a moment, it has its own agenda) the Remain camp is centred in metropolitan London at odds with much of the rest of the country would do nothing to dispel accusations of elitism. It's perfectly plausible in fact that a new referendum today might even get a larger majority for leaving.

One doesn't want to be too melodramatic, but it's not impossible to imagine politics in the UK descending into the kind of inflammatory maelstrom that Brits have always liked to think happen somewhere else.

Enough of that and back to the point. Which was ? Oh yes ..... sterling and sterling assets. Softer Brexit may be what the markets want, but if it provokes a political free-for-all, the effect may be entirely different .... and if Theresa May and her colleagues feel forced to call a general election on the issue, then that may well be exactly what Britain gets.