Brexit fears stalk global markets? Only up to a point.
Since the polls turned in leave’s favour, the FTSE 100 index has lost 370 points, or 5.8%, but is still well above February’s lows. The pound has fallen from $1.45 to $1.41 against the dollar, and from €1.28 to €1.26 against the euro. These are notable moves but they are not big enough to be called panicky.
Meanwhile, Tuesday’s record-breaking piece of market action – German 10-year bunds trading at a negative yield – was also being blamed on Brexit-inspired fears of a pan-European jolt to economic growth.
But, again, one needs to tread carefully. German yields have been falling ever since the financial crisis of 2008. The march from 1% to zero started a year ago and (aside from low growth and low inflation in the eurozone) owes much to the European Central Bank’s huge programme of quantitative easing, or buying bonds regardless of price.
Brexit, to be fair, may have contributed something to the latest fall in German bond yields. But let’s not overstate it. A fortnight ago, when a remain victory looked an 80% probability, investors were willing to receive 0.2% for 10 years to lend to the German government; now they are willing to pay 0.05% for the privilege. A line has been crossed, but we’re talking small actual movements in prices.
So, if one takes a step back from the non-existent mayhem, two conclusions are possible. First, investors are only mildly worried about Brexit and think the short-term economic consequences are either hard to predict or exaggerated. Alternatively, markets don’t think it will happen.
The guess here is that it’s the second. Why? Cast your mind back to last summer when Greece’s survival in the eurozone was in genuine doubt. The country’s banks closed and financial markets fell into a proper swoon. Yet – in financial and economic terms – Greece was, and remains, a tiddler. Brexit, rather than Grexit, would represent a far bigger shock to the entire eurozone/EU project.
No wonder the German political and financial establishment is pleading for the UK to remain. It would rather delay the day when the eurozone has to sign up to fiscal transfers – rich countries paying for poorer members – to ensure long-term survival. Treaty changes will be necessary and demands for referendums will only be encouraged by the UK’s example. While one vote to leave the EU might be tolerable, two might lead to a deeper unravelling, especially if the next opt-out were to be a eurozone member such as the Netherlands.
Have markets priced in such political risks? Almost certainly not. There has been a modest widening of bond spreads between Germany and so-called peripheral eurozone members, like Spain and Portugal, but faith remains high in the ECB’s ability to do “whatever it takes” to keep the show on the road.
Maybe, in the long-run, a UK exit from the EU would have a bracing effect of the eurozone’s attempts to cure its deep economic ills. That must be one possible script since eurozone politicians seem capable of collective action only when presented with a crisis.
Just don’t expect markets to display any such breezy confidence if they wake up to a leave vote on 24 June. If Grexit looked scary, Brexit raises bigger uncertainties. The past week’s market action, one suspects, would look like a tea party.
Shy Green comes out of his shell
Hurrah, Sir Philip Green has “given long and hard thought to the matter” and decided to turn up to answer questions from MPs on Wednesday about “the very sad BHS story”. He’s still complaining about parliamentarians making up their minds before they’ve heard the evidence but, never mind, he’ll be there.
But, please, Sir Philip, drop the parallel grumble about this being your “first and only opportunity” to tell your side of tale. You were free at any point since BHS’s administration in April to give an account. You could have issued a statement, held a press conference, whatever you wished. You have never previously been shy about sharing your views. Well done, the MPs, for ensuring we hear them.
Bookies need a nought to worry about
Is the Gambling Commission getting tougher? Well, the financial penalties for disobeying anti-money laundering and responsible gambling rules are becoming bigger. Betfred received an £800,000 penalty on Tuesday. That – and an £880,000 hit to GalaCoral a few weeks ago – was a step up from the derisory £280,000 handed down to Paddy Power earlier in the year. All different cases, of course. But given the size of some of these firms, penalties of less than £1m don’t hurt. Add a zero and the commission might get noticed in boardrooms.
guardian.co.uk © Guardian News and Media Limited 2010