WE SHOULD BELIEVE WHAT THE MARKETS SAY ABOUT BREXIT

PETER JONES

Why look in the crystal ball of Treasury, IMF, etc, forecasts of what may happen to the economy if there is a Brexit vote, when you can look at what’s happening right now?

Here’s an example. This is an e-mail message I received yesterday (June 6th) from an analyst at Caxton FX, a foreign exchange trader.

“The pound is weaker this morning as new polls show a lead for “Leave”. YouGov’s poll put “Leave” in the lead at 45%- 41% (from a survey of 3,405 people), while TNS polls showed a split at 43%-41% (a survey of 1,213 between May 19-23).”

The message is pretty clear. If polls indicate that a pro-Brexit vote has become more likely, the pound sterling gets weaker, and vice versa.

If there is any doubt, here’s an extract from ThisIsMoney a week ago: “The pound was hit yesterday when an opinion poll revealed a surge in support for the Brexit campaign. The ICM phone poll suggested a 14-point reversal as, once ‘don’t knows’ were excluded, Brexit was ahead 52-48 compared to a Remain lead of 55-45 two weeks ago.

“The plunge in support for Remain in the ICM poll also produced an immediate market reaction as the value of the pound dropped against euro and dollar.”

Quite clearly, financial markets think that Britain leaving the EU would be bad for the British economy.

So what is dismissed by the out-ers as scaremongering by the Treasury, the IMF, the OECD, the World Bank, plus every commercial bank, is precisely the opposite – realistic expectations of a poor outlook for Britain outside the EU.

Now, many of the leading out campaigners are libertarians. Much of their rationale for supporting Brexit is that Britain will be able to abolish miles of red tape in a great bonfire of regulations.

But libertarians also believe in markets. Markets, they say, tell the truth.

So why don’t they believe what the markets are saying about a Brexit vote?

If there is an answer, I’d like to hear it. I’m inclined to think that it is only a half-baked one, relying on the fact that a depressed value pound earns more for exporters, producing a temporary boost for the economy.

Against that, however, there are off-setting factors, such as imports becoming more expensive which would boost inflation. That, and the fact that sterling would need support, suggests that the Bank of England would have to raise interest rates, causing an increase in the cost of living, especially for folk on modest incomes.

If this is the shot-in-the-arm that the British economy needs, it seems more like blowing an arm off in order to lose weight. You would certainly lose a few pounds but your ability to earn more in the future would be seriously impaired.

Personally, I am inclined to think that the warnings of Brexit catastrophe are overdone. But I do think that an economic standstill is certain, particularly because the out-ers have no clear vision of how Britain will relate to the EU – our most important trading partnership.

That can’t be sorted out in weeks or even months. If the out-ers have a point that in a union with 28 sovereign member states it is tough to get unanimity on important matters like trade deals, why on earth do they say that a deal allowing Britain continued free access to the EU single market will be inevitably, and quickly, agreed among 27 states?

The Brexit case is not just shot through with contradictions that render it incoherent, it is, as John Major says, deceitful from start to finish.

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  Comments: 1

  1. Robert Thomas


    The large trade deficit clocked up by the UK is a powerful argument that sterling is indeed overvalued. So would a weaker pound be such a bad thing ? A weaker pound would of course be helpful to exporters and should also reinforce moves towards re-shoring of industry. Sterling’s strength has resulted partly from almost every other country trying to devalue their currencies at a time of slow economic growth. Peter Jones notes that a weaker sterling would lead to higher inflation; has he not noticed that the BOE is actually trying to raise inflation ? He also says that it might lead to higher interest rates; well there is a large body of economic opinion that thinks that higher rates would be healthy but countries dare not do so in case their currencies strengthen.

    The importance of trade agreements is vastly overstated. The EU does not have trade agreements with two of its largest trading partners, the USA and China. Every country in the world has access to the European Single market and the tariff barriers are clearly sufficiently modest that trade between non members and the Single Market has been growing faster than trade between members of the Single Market. Peter Lilley , former secretary of state for Trade and Industry at the time of the implementation of the Single Market , has estimated that even in the event of no agreement the average tariff that the UK would face on exports to the Single market would be less than 3% but believes it almost inconceivable that no agreement would be reached. The Economist magazine estimated that the average trade tariff between developed economies was 3% so tariffs are not going to be a major problem. Post Brexit the UK would be free to push harder both on exporting financial services, an area in which the EU has made little progress, and expanding trade with the rest of the world.

    Foreign currency traders are hardly noted for their long term views or in depth economic analysis. It would be foolish to allow long term policy to be dictated by short term movements in the currency markets.

    RT

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