Having worked in both finance and politics, it’s always remarkable that each side thinks the other holds more information. The City fears deals done behind closed doors; and, come to think of it, that’s exactly what the politicians fear too. The reality, unfortunately for those conspiracy theorists amongst you, is that it’s often more haphazard than that.
Thus, the path for Brexit. Initially, there was too much doom, with the real economy pootling along unaffected. Now, there has become too much complacency, with Q4 upon us and reality biting. This is not a political argument for whether Brexit is a good idea; rather, a recognition that the balance of risks is becoming skewed. There will be an impact, and the world’s businesses will not be waiting 2 years, or even 6 months, to see the UK’s negotiating package. Money moves faster than Politics, and businesses need to make changes now if they are to capitalise in the years ahead. Note the latest KPMG survey of businesses with £100m-£1bn turnover: 86% are indeed confident about the future but 76% of them are also expecting to move some of their operations abroad. Meanwhile, the big US financial companies met Theresa May last week and it has now emerged they are threatening to relocate unless they get more clarity. They might well believe that our PM is being obstructive or unhelpful, but the truth is that we are in a Catch 22 situation. The banks and other businesses are looking to politicians for guidance; but the politicians are thrashing out their own internal negotiations before they can even begin to offer a roadmap. The two make decisions completely differently. Business is pro-active; it has to be. If you’re too slow, you’re eaten up. Politics, on the other hand, is non-linear and reactionary. Even if May’s government had a clear plan, it would do no good to launch it now, for fear of destabilising not only a multi-step, but also a multi-polar, negotiation.
Into the vacuum the market will eventually step, putting a risk premium onto UK assets. Money will genuinely flow out of the country. Money never sleeps.
Likewise, the US Presidential Election, which hots up with the first debate tonight. There are 3 debates but this one will no doubt set the tone. 100m are expected to watch. Will they both with parts 2 and 3? Hillary is being advised to ‘make Donald Trump angry‘. Blondemoney isn’t so sure. If she hectors and he huffs, then the net result could be that two already disliked candidates become even more disliked, turning off moderate voters and bringing out the extremes. That makes the vote even harder to predict.
So – bond vol at the year’s lows? VIX almost at the year’s lows? GBP/JPY at the year’s lows? Watch out for some political wobbles this week.