The government has started to reveal its Brexit plans and investors aren't happy
‘The currency is now the de facto official opposition to the government’s policies,’ according to HSBC’s David Bloom, following last night’s flash crash, which has left sterling down 2.7 per cent at about $1.23.
That reflects pretty harshly on Labour but, more importantly, the volatility of the pound — including a brief six per cent drop — is a warning to Theresa May’s government that investors will fight a hard Brexit.
In a note circulated this morning, Bloom wrote:
“We used to have the bond vigilantes. These were the collective that punished western governments via higher bond yields when they vehemently disagreed with policy. This helped keep government fiscal ambitions in check. With QE this mechanism is dead. However for FX it’s alive and well.
Sterling used to be a relatively simple currency that used to trade on cyclical events and data, but now it has become a political and structural currency. This is a recipe for weakness given its twin deficits. The currency is now the de facto official opposition to the government’s policies.
The FX market is exhibiting an uncanny resemblance to the five stages of grief. First, following the Brexit vote came the denial – theories circulated whether a second referendum would have to take place. Second was anger – claims the vote was unfair. Third was the bargaining – arguments maybe it wouldn’t be that bad, what if the UK followed the Norwegian or Switzerland model. Now the fourth a gloom is prevailing over sterling.”
In other words, despite all the talk at Tory conference about the strength of the British economy, the market developments of the last 24 hours suggest that the UK is about to get slammed.
This is partly as a result of the anti-immigrant rhetoric on show at Tory conference, which has heightened hostility between the UK and European leaders, including Angela Merkel, Jean-Claude Juncker and François Hollande.
Additionally, May has given her strongest indication yet that she is planning to take the UK out of the single market, and has not made it clear if access will be preserved for the financial services sector.
JP Morgan also interprets the drop as an indicator that investors are seriously recosidering their positions, suggesting that many ‘were awaiting clarity from the government about what type of Brexit it would prioritise, and presumably were hoping for a softer Brexit that minimized the longer-term economic damage.’
As the FT puts it, investors are ‘abandoning any thought of best-case scenarios for Brexit.’
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