Small island adrift

June 28, 2016

Britain’s political and economic crisis deepened overnight with Fitch joining other major credit ratings agencies in downgrading its sovereign debt. The pound hit a 31-year low as part of a market lurch which has wiped a record $3 trillion off global shares since the vote, with investors ignoring finance minister George Osborne’s soothing words earlier in the day. England’s ignominious Euro 2016 defeat at the hands of lowly Iceland only compounded the gloom: “Brexit2″ trended on Twitter in an explosion of gallows humour. “The beautiful Irony,” joked one Twitter user. “#England knocked out of #Euro2016 by country not even in the EU! Maybe that’s why they pressed the #Brexit button.” Just as humiliating, it turns out there is a push to remove English as an official language of the European Union…

To be sure, everyone knew there would be turbulence after a Brexit vote. But we are still far from reaching any semblance of stability on either the economic or political fronts. PM David Cameron travels to Brussels for an EU summit dinner where he will be told not to expect any informal bartering on a post-Brexit trade deal before he triggers the Article 50 exit clause. He is not invited to the second part of the summit on Wednesday when the other 27 leaders — who would much prefer to be solving the migrant crisis or working out what to do with Russia — will plot strategy on the UK. It has emerged that powerful City of London lobbyists will be pushing Britain to conclude a Norway-style accord with the EU that will allow them to keep selling financial services to the Europeans. It will be recalled that Norway had to commit to freedom of movement, hefty payments to Brussels and EU rules to get access to the EU’s single market — critics call it “download democracy” because Oslo gets notified remotely by Brussels of the laws its parliament must implement. If we are heading in that direction, so much for the Leavers’ rallying cry of “taking back control”.

Back home, domestic politics will be dominated by the sideshow of the internal coup against opposition Labour leader Jeremy Corbyn by a large chunk of his parliamentary party. He may lose a “no confidence” vote but has vowed to battle on — thus far he has the backing of the trade unions and a new generation of grass roots supporters.


Volatility is often just a euphemism for falling prices in financial markets, but we may be in line for period of really volatile swings characterized by sudden and outsize snapbacks as well as withering lunges. Tuesday sees the first EU summit since the Brexit vote and there are murmurs of a more coordinated central bank policy response to further steep losses in financial markets and investor confidence. The Bank of England’s response to the situation is still awaited, with the plunge in gilt yields on Monday reflecting talk of an interest rate cut and further QE. Fed chief Yellen cancelled her trip to the ECB conference in Portugal, while ECB chief Draghi cut short his appearance there to head to the Brussels summit. China’s Premier Li said in Beijing that China will not allow ‘roller-coaster rides’ in its markets after Brexit.

They have lots to consider. Friday and Monday were the worst two days for global equity prices since the aftermath of the Lehman collapse in 2008 and everyone is well aware of what that period ushered in for the wider economy. Although the political risks to the stability of the UK and the wider EU are very different to the banking crash of 2007/2008, the sorts of stress seen in bank shares on Monday will raise alarm bells across the planet. Barclays, Lloyds and RBS have lost a third of their value in just two trading sessions. European banks are feeling the heat as well and this is where the situation could become systemic in a similar fashion. And for all the reverberations across Europe and world markets, domestic-facing FTSE 250 midcaps are taking some of the biggest hammerings and many now see a UK recession as soon as this year. So, with lots of policy and political reactions still uncertain, there has been some steadying overnight, with sterling up a fraction and the likes of Japan’s Nikkei225 recouping losses of about 3 pct to end slightly in the black. There was a similar picture in US and European stock futures, which snapped back more than 1 pct after two days of relentless selling. Treasury yields have firmed slightly from their lowest in four years. Brent crude has clawed back above $47 after plunging below that level on Monday to its lowest in over a month.

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