UK turmoil shows up markets as amoral and impotent

June 17, 2016

The author is a Reuters Breakingviews columnist.  The opinions expressed are her own.

Britain’s referendum on its European Union membership shows voters can still have the whip hand over amoral financial markets. Traders will trade on any scrap of information, even tragedy, as they did after the killing of a pro-EU British lawmaker on June 16. In contrast with the recent euro zone crisis, markets are more at the mercy of events than moulding them.

Sterling has rebounded 2 percent from 10-weeks lows against the dollar and UK stocks have risen because of speculation that the murder of Jo Cox, an opposition Labour Party lawmaker and a vocal advocate for Britain remaining in the EU, might sway the outcome of the close-run June 23 vote.

It’s a feature of markets that traders instantly weigh up the potential economic and political ramifications of each new fact, figure, and rumour – regardless of what they may feel. The same happened when they drove the yen to a record high against the dollar in 2011 after a devastating tsunami ravaged Japan’s northeast. And they drove the euro up as much as 2 percent against the dollar on Sept. 11, 2001 after two hijacked planes hit the twin towers of New York’s World Trade Center.

Market moves sometimes determine what happens next. This was the case when the yen’s 2011 surge spurred the Group of Seven leading industrial nations to intervene jointly in the currency markets for the first time in more than a decade. Even more so during the euro zone crisis when rising government bond yields exacerbated problems to the point of jeopardising the single currency project.

In other instances, asset prices are in thrall to events. This is definitely the case in the run-up to the British referendum. Traders are transfixed by each new opinion poll. The balance of power may, however, shift once Britons have had their say. Whether sterling swoons or gilt yields surge after the referendum will help decide what course the economy and policymakers take next. That’s when markets may turn the tables on voters.

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I think that lately we have been mixing up the jars. I hate as much as the next long term investor the turmoil of the markets, the herds that create the chaos based on rumours (moral or amoral ones). Even so, markets are not supposed to be moral. Besides the old saying “buy the rumour, sell the news” has been here for a while – amplified now by the low-cost brokerages and by the “too much information” syndrome.

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