There is little that is material to panic about—so farby George Magnus / July 4, 2016 / Leave a comment
After the referendum, the UK’s most important existential event since 1945, a curtain has lifted to reveal a major political and constitutional crisis. It has only been just over a week since we heard that Britain voted to “Leave” the European Union, and for the time being we are in a vacuum. Quite who fills it, with what, and under what circumstances is unknowable, and it is all too easy to imagine possibilities that are deeply disturbing.
But for those expecting a rout in financial markets, there is precious little to write home about, at least so far. A number of City talking heads and several high profile commentators have mocked their gloomier brethren. The Daily Mail—not normally known for its financial and economic acumen—ran a lead story on 2nd July entitled Stop panicking and put the country first. It singled out the Financial Times as representative of City and industry leaders who, it said, had panicked about the aftermath of the Brexit vote like startled sheep. So, what can we deduce from the relatively sanguine performance of financial markets?
The straight answer is nothing. The FTSE 100 index did stage a significant recovery last week after referendum-related losses. But the FTSE 250, which comprises more UK-focused companies, didn’t, and ended up down six per cent over the week. The stock prices of a number of companies that have no export business recorded losses of up to 20 per cent.
“the Pound has been falling since it reached $1.71 in July 2014, and yet the UK’s trade and external payments position has gotten steadily worse”
For export-oriented companies, the fall in the Pound is a mitigating factor in the outlook. It fell last week, ending at just over 1.3250 to the dollar, compared with about $1.45-1.47 before the night of the referendum. The optimists welcome the fall in the Pound, likening it to the big drop that ensued after it left the ERM in 1992, and even anticipating, as the Mail put it, “wonderful opportunities.”
There is no question a cheaper Pound will help some companies but it depreciation is most unlikely to offset other economic problems…