From Capital & Conflict (GREAT BRITAIN)-
Did you feel the shudder that went through markets on Friday? The FTSE 100 fell 1.86%. Italy’s main index fell 3.62%. In Germany, the DAX fell 2.52%. And Japan’s Nikkei kicked off Asian trading this week with a 3.51% fall. It’s down 15% year-to-date. What’s got everyone spooked?
Brexit, of course. Several polls were published showing Leave with a lead. The bookies still have Remain winning comfortably. But Leave seems to be peaking at the right time (if not a bit early). As a result, investors are rethinking their bets.
The bond market is the big winner at the moment. UK gilts touched new lows last week. All-time lows. The ten-year gilt currently yields 1.21%. The 30-year yields 2.04%. It’s like the bond market has become a Brexit bomb shelter for shell-shocked British investors.
Bond market ducking for cover
The prime minister and the chancellor kept the pressure on over the weekend. David Cameron warned of a “black hole” in public finances if Britain leaves the European Union. He said public sector pensions (which grow by 2.5% per year) were especially under threat. The chancellor said over 800,000 jobs could be lost.
Labour remain silent as the Conservatives eat themselves alive. And meanwhile, in markets, we’ll hear from the Bank of England’s (BOE) Monetary Policy Committee on Thursday. Don’t expect the BoE to touch interest rates. But given the venom in the Brexit debate right now, it wouldn’t surprise me to see the bank issue a stark and urgent warning on the pound, the current account deficit, and interest rates.
It’s not just the BoE meeting. The Federal Reserve meets Tuesday and Wednesday. The markets discounted the chance of a rate hike on the back of weak US labour market data. But we’ll see. What Janet Yellen says in her post-meeting press conference is as nearly as important as what the Fed does with rates.
But at this point, if you’re reacting to markets or to central banks, you’re over-reacting. The whiff of panic in the markets is investors realising that central banks aren’t in control. Markets always win. This is a point made well by my mate Vern Gowdie when he joined me on the podcast.
Adrian Sykes sent his latest over the weekend. Adrian, in case you missed my previous introduction, covered the last election for MoneyWeek. As far as I know, he was the only pundit to correctly forecast an outright Conservative win. Here’s what he wrote on Friday:
The odds haven’t changed much: thousands of small bargains have been matched by many fewer (less than 30%) but much larger ones. Bookies’ prices still indicate 3 to 1 in favour of Remain.
The polls, whatever value one can place on them, have swung strongly towards Brexit: Ipsos Mori this morning puts it as much as ten points ahead of Remain (55/45). The worry now must be that the outcome on 23 June will be too close to call, with implications that I am fearful of.
Lynton Crosby is reported to believe that the vote is on a knife edge; and even Downing Street is said to be reconciled to losing and preparing for the aftershock. One consolation for David Cameron is that nearly a million people, 2.5% of the electorate, have signed up to vote this week: mostly under 44 year-olds, who have just woken up and are thought 75% likely to vote Remain.
Against this, there are good reasons for the sudden build up in momentum for Brexit. James Dyson, especially trusted by voters, and Lord Bamford, Britain’s largest machinery exporter, have come out strongly for Brexit. Four Syrians, rescued under the official programme to resettle 20,000 from refugee camps, are to be charged with the attempted rape of a 14 year-old girl in Newcastle. The ever-helpful Herr Schauble, by stating that the UK could not expect to trade within the single market after a Brexit, has reminded us that it is Germany that runs the EU.
Dominic Raab (son of a Czech immigrant and married to a Brazilian) emphasised last night, on the BBC Parliamentary Channel, that the European Court of Justice exists not to dispense law but to create a European super-state. As an international lawyer who has worked within the system, and a certain candidate for promotion to the Tory front bench after the referendum, his arguments were especially persuasive. Michael Gove made a typically reasonable and believable case too; in contrast to the dreadful personalised attacks on Boris by three shrill women in an ITV debate the night before, which showed just how degenerate this campaign has become. Lastly, a Labour insider admitted yesterday that his party is now haemorrhaging votes to UKIP (which means Brexit) throughout the North of England.
The clearest indication that mayhem may be less than a fortnight away is the precipitous fall in UK financial shares this week. UK investors are dumping them across the board and foreigners are joining in, albeit in lower than average volume. Many are sitting on their hands and covering their eyes. Barclays Bank, Prudential and Standard Life were all off around 4% yesterday. Sterling fell 1.5% against the $ and is approaching lows last seen in February. Curiously, the £ is holding up better against the €uro, which makes one think – maybe global investors consider that the EU has as much to lose from Brexit as the UK. I certainly believe it.
Remainers who are totally convinced that their side will win by an acceptable margin (5% plus), and with a turnout of at least 65%, could do well by buying UK banks (down over 10% this week). They will be extremely volatile for the next twelve days; but would rise by at least 10% on 24 June. There may not be much further downside in them anyway and there will probably be a bounce in the market whatever the result, but I’m not brave enough to bet on it myself. Frankly, the market is shrieking that Brexit will win; and I am not far from believing it will happen too. The winning margin will matter as much as the result. It could be that it is this that is really rattling the market.
P.S. Versailles, a sexualised drama (not to be watched in front of your daughters), is revealing in more ways than the obvious. The programme is made in France by the French, but with many British actors and in English. It is a reminder of Britain’s ‘soft power’ and strong global influence.
The Queen’s Birthday Parade today, with their colours trooped by some of the finest soldiers in the British army, was a timely reminder of Britain’s glorious history and cherished traditions. When I suggested to my daughter that the Queen’s 90th birthday (and Brexit) might be celebrated by replacing HMY Britannia, she told me to get a life.