They think it’s all over....
The financial markets wobbled last week as the opinion polls moved towards “leave” and the bookies odds started to shift to indicate a greater risk that Britain was heading out.
This morning, however, the mood has shifted. Sterling is up , shares are surging by 2 to 3 per cent on average and money is moving out of so-called “safe haven” assets.
The markets, for today anyway, think it’s all over. They have noted the shift in polls towards “ remain” over the weekend and are ignoring just how finely balanced they show public opinion to be. Investors and traders are also looking at the bookies’ odds.
These closed significantly last week, to point where a “leave” vote was seen as a 40 per cent plus probability. Over the weekend the odds on “leave “ have lengthened considerably, with a vote to exit now given a probability of less than 30 per cent.
Cash
Don’t be tempted to think that the markets are trading on the basis of what they “ want” to happen. Yes, it is the case that most investment houses have warned of the economic dangers of Britain exiting the EU.
But money is money and investors will move on the basis of what they think if going to happen. And they are betting that the bookies’ odds – and the flow of cash behind them – are correct and that a lot of the “ don’t knows” in the polls will break towards “remain.”
One of the great old market cliches is “ buy on the rumour, sell on the fact.” And so for as long as the trend seems to be towards “ remain” this week, we can expect sterling and share markets to remain strong.
This could mean the market impact of the vote itself could be more limited. But who knows how the next few days will go. If momentum is seen to swing back towards “leave” then the markets will quickly go into reverse. And if the markets lull themselves into the certainty of a “remain” vote and “ leave” is the result, we could see chaos on Friday.
Economy
While it is always unwise to overinterpret the markets, the broad reasoning for the moves we are seeing is that a Brexit would be bad for the British economy and also for Europe.
So if you believe Brexit is going to happen, then you sell sterling and UK shares and also, to some extent, other euro zone shares. If Britain does exit, Sterling could fall against the euro, but as the EU economy could suffer, the euro could weaken too. In this scenario, the US dollar would be a Brexit winner. But be careful, currencies are one of the most notoriously difficult things to forecast.
The irony of all this is that if the vote is to remain, then – in economic terms – this will be a bit like the Y2K computer bug, much warned about but which amounted to very little. Politically the reverberations will go on either way, but economically the markets feel things are clearer.
Brexit is bad, Brexit is good. Watch sterling for a good indicator in the next few days of the mood.
