Helen Thomas is CEO of macro advisory consultancy BlondeMoney. She is a former adviser to George Osborne.
Amongst all the chatter about what kind of Brexit we might end up with, and whether the Prime Minister will remain in place to deliver it, there has been one actor who has been entirely absent from the drama: the financial market. Far from being in its usual place, centre of the stage, the diva upon whom the action revolves around, it has been relegated to a bit part, merely a mechanical.
This is unusual. From Grexit (2013) to Austerity (2010+), we were told that the politicians would be put in their place by the bond market vigilantes. Now, the markets are mute. Even the dramatic fall in Sterling on the night of the Brexit vote is relegated to a footnote: consequential for real incomes at the time, but now merely a dodgy hedge fund bet linked to Farage’s late-night Remain concession.
So far, any fear of Brexit inducing a market crash has been waved away. All the politicking has been dismissed by investors as mere noise. Both Sterling and the FTSE 100 Index have staged recoveries since the referendum: GBP/USD has come within a few percent of its pre-vote level, and the stock market has hit a record high. The UK benefits from a “Safe Haven Dividend”. Our rule of law and reputation for common sense have seen our assets frequently used as a port in a storm. Investors felt it was just inconceivable that the cold-blooded Brits wouldn’t come to a rational Brexit position in the end.
The negotiations to date appear to have borne this out. Every big UK-EU summit has ended with an agreement. Theresa May has been threatened, but survived. The Jacob Rees-Mogg and Anna Soubry shouting is just par for the course as the UK fudges its way through to something sensible.
Something which, according to a survey of 2,500 European companies by FTI Consulting in February, would look almost exactly like it does right now.
No wonder that three-quarters of respondents confidently expected to have clarity on the government’s position by the summer. Concomitantly, the same proportion expected to make any irreversible Brexit-related decisions by then too.
Now the summer is here, and the only clear position from the Government is that it can’t have a position. This week’s votes have shown that the split between the two flanks of Remain and Leave cannot be bridged. The Government will struggle to find the consensus to deliver a deal. This won’t stop ideologues on either side. They sniff that the parliamentary arithmetic can pull the deal in their direction. Their noise level will go up exponentially.
This leaves financial actors in a quandary. They believe No Deal surely ends up as Some Deal, much as Tsipras showed in Greece. If Brexit follows the same playbook then there’s no need to take any action. They still bear the scars of Tsipras’ U-turn, when they unprofitably sold the Euro in anticipation of its break-up. Yet as Boris Johnson reaffirmed in his resignation statement, No Deal preparations “should now accelerate”. Financial markets must at once be ready for this, while anticipating that it would never happen. Caught in this complicated quantum probability, it’s no surprise the actor has gone quiet.
In addition, global financial market volatility has rarely been so low. Prices have become divorced from reality, propped up by a decade of quantitative easing. Initially, this was an emergency measure. Central banks were forced to make money cheap in order to prop up the financial system. No-one could have expected that ten years after Lehman Brothers failed, the Bank of England would have managed one hike (after one cut) and the European Central Bank would still be stuck on Alice-in-Wonderland negative interest rates. The persistence of cheap money created risk-free profits. That led investors into passive investments: if the market always rises, there is no need to pay large fees to active stock pickers. Simply buy the cheapest thing that keeps going up. Money has flowed into risky assets, depressing volatility further and creating a virtuous circle. Politicians become exogenous and irrelevant to financial markets in this regime.
Finance loves numbers. It has been left with the simple equation: “Passive momentum money machine” plus “Perma-QE” equals “ever rising prices”. There is no room for the small matter of political risk in this model! If a risk can’t be quantified, then it can be ignored.
Until it can’t. The tap, tap, tap of wafer-thin government majorities, unravelling agreements, and shifting poll numbers will make their way into the market’s calculations. At some stage, it will become prudent to trim further the exposure to UK assets. Business will have to announce strategies to cope with No Deal. Irreversible decisions can’t wait. The political noise will be replaced by the genuine movement of money.
That might happen in the summertime when Parliament goes on recess. Money, as Gordon Gekko famously warned us, never sleeps. The two separate worlds of politics and finance are about to come crashing into one another. The diva is warming up in the wings, ready to get back on stage and remind everyone of her power.