Britain leaves Europe: How did the markets get it so wrong?
It’s been a hell of a night. Even when Lehman went down – I don’t remember so many traders saying they got it so wrong, so quickly.
The shockwaves of the leave vote will reverberate around global markets – and right now – no one is sure how low the floor is.
Sterling has crashed 11pc, hitting a 30-year low and the FTSE is expected to open down 9pc. European markets, meanwhile, are forecast to fare even worse, nosediving 15-20pc, sparking another probable euro crisis.
Like 2008, the hand of central bankers will again be forced and the big question will be whether they come up with enough to calm markets.
Mike Amey, from Pimco told us on Wednesday that Brexit did not represent a systemic risk. Well today, his theory will be tested.
The Bank of England Governor Mark Carney is understood to be preparing a speech and statement to follow the Prime Minister – both are thought to be delivered around the market open.
Persuading the market there is enough liquidity will be key – but remember that already broker dealers had suspended some sterling related trades or stopped taking orders.
The big problem the Bank of England faces is that Carney’s hands are to a great degree tied. The UK economy now faces a potential inflation problem but isn’t strong enough to withstand a rate rise. On the other hand, cutting rates will also be almost impossible given the currency is falling and the damage it would do to British building. That doesn’t leave a lot left in the toolbox.
And it’s not just here in the UK, across the pond, Janet Yellen will probably be feeling like the opportunity to raise rates has passed with global risks now on the increase.
Through the early hours of this morning, hedge fund bosses messaged that they ‘felt sick’ or were ‘being wiped out’ or even acknowledged that the complacency of the last week meant they had ‘f**ked up’- many blamed the chancellor for exaggerating the panic by threatening a punishment budget before the vote.
This has fuelled worry about a forced increase in austerity after a Brexit vote as well as a deepening hole in the public accounts and made the UK an even more risky investment for money flows.
For consumers who went to the Post Office this week in record numbers to swap their pounds for holiday money – this result shows them to be more astute players of the market than City traders. Indeed, this anti-establishment referendum has showed that the common man sometime has a better steer on what will happen than those in the political and financial elite.
But after severing its ties of 43 years to Europe, Britain will have to take a big gulp, and see how dangerous this split is not just for economies across the union but across with world – and especially on the continent.