So, the “smart money” was wrong. Ahead of last Thursday’s referendum, it really did seem that the Remain camp had it in the bag. As the big day approached, successive opinion polls suggested, ever more decisively, that the UK would opt to stay in the European Union.
As campaigning reached a crescendo, on-line prediction markets, showing the weight of money punters had bet on either side, became emphatic – pointing to an 80pc-plus probability we’d stay in. With “decided” voters mostly showing Remain just ahead, and most “undecided” also seen as “more likely to stay with what they know”, practically the entire political and media class agreed that, while it might be close, the UK electorate would reject Leave.
Little wonder, then, that by Thursday morning, as voting began, the mighty foreign exchange markets were also skewed heavily in that direction. For the entire week before, the pound had climbed steadily, as uncertainty lessened and, for many, largely evaporated, crystallising into a slam-dunk conventional wisdom that Remain would ultimately prevail.
That’s why the result in just a single constituency produced such a violent market reaction. When news came through in the small hours of Friday morning that Sunderland had voted to Leave, sterling fell against the dollar by no less than 3pc – a jaw-dropping reaction to just one among 382 referendum counting constituencies, and only the third to declare.
Sunderland has been expected to vote to quit the EU by a margin of around 6 percentages points. The gap, in the event, was a massive 22 points. Sunderland, a centre of UK car-making, a beneficiary of foreign direct investment over many years apparently linked to our EU membership, had shown a streak of real defiance. From that moment on, it was clear this referendum could produce a very serious political upset – showing, yet again, the vast majority of pollsters had got their sums horribly wrong.
Much has been made of the “market volatility” following this Brexit vote, and rightly so. Six hours after Sunderland, the pound had collapsed to its lowest level in over 30 years, suffering its biggest one-day fall in living memory. When the London stock market opened, the FTSE-100 index of leading equities nose-dived a nerve-jangling 8.7pc, given the extent to which traders had previously banked on the UK staying in. The spectacle of a British Prime Minister resigning outside Downing Street, and gold prices soaring almost 10pc to a two-year high, is enough to rattle the most sanguine of investors.
For all the talk of party in-fighting, leadership elections and national identity, it’s the impact of Brexit on financial markets that will likely dominate the news, and in turn both UK and pan-European politics, for weeks to come. I have several initial observations. The first is that, for all the early stomach-churning headlines, with “£150bn wiped off the value of stocks”, asset prices have so far proved resilient.
The FTSE-100, for instance, after its initial alarming drop, quickly made up lost ground. By close of play Friday, London stocks were down just 1.9pc, meaning that the FTSE-100 is now slightly up on last weekend. After its Brexit plunge, sterling similarly staged a recovery, falling from $1.50 to $1.33, but then heading back towards $1.40.
My second observation is that, despite this initial resilience, we are by no means out of the market volatility woods. Heavily weighing on the pound, for instance, is the UK’s external deficit – around 6pc of GDP. Added to that is our on-going fiscal deficit which, for all the talk of austerity, remains stubbornly high. New figures show government borrowing during April and May of £17.9bn – higher than the same two months last year. While some deprecation of sterling is good, making exports more competitive, a freefalling pound would provoke an inflation spike and possibly the spectre of rising interest rates.
And, while equity prices have shown some mettle, they are likely to be tested thoroughly in the days to come, as the markets digest this tumultuous Brexit news. Of particularly importance are banks stocks – as it was the banks, of course, which sparked the 2008 financial crisis. Barclays and Lloyds initially fell more than 30pc, before partial recovering, but remain heavily down. US banks shares followed their UK peers downwards, although not as sharply. While the Western mega-banks remain systemically dangerous, they’re carrying fewer bad debts these days, and are managed less recklessly – so pose less danger. Their respective governments, though, are now far more indebted, so less able to provide support.
My third observation is that while the pound fell against the euro on Brexit, it may be that – counter-intuitively, and when the dust has settled – it is the single currency that ends up down against the pound. This is because of the view the political shockwave of Brexit could do more damage to the Eurozone than it does to the UK. The CAC index of leading French equities closed 8pc lower on Friday, for instance, while the German DAX was down almost 7pc. Italian and Spanish stocks closed over 12 pc down.
So while the pound lost a chunky 5pc against the euro on Friday, causing many (amidst otherwise earth-shattering news) to bemoan not changing their holiday money the day before, it may be that the euro eases back against sterling in the days to come. This is because of a growing sense that Brexit brings the entire “European Project” into question. In that case, the European Central Bank, in a bid to show “solidarity”, may feel it necessary to hose down Eurozone sovereign bond market with cash, upping its programme of quantitative easing – aka money-printing – so putting pressure back on the euro. Having recently upped its extraordinary monetary measures from €60bn a month to €80bn, I wouldn’t be surprised to see the ECB turn the monetary spigot some more.
These market considerations aside, Brexit has clearly sparked a UK political crisis of epic proportions. The Conservative party will be in turmoil for weeks – for all the Prime Minister’s attempt to quickly resign in a dignified manner. Anger among many backbenchers and constituency members about the government’s relentless use of “Project Fear” is palpable. And, within the Labour party, of course, the inability of so many of its members to understand the fears and concerns of ordinary constituents represent a quite staggering political blunder.
While decisive, the 52:48 margin by which Leave won was relatively close. Many within Labour feel that had Jeremy Corbyn shown more willingness to back Remain, the UK would not have voted Leave. Already, while the Tories seem keen to keep Cameron in place for now, there are declared moves to oust Corbyn. While splendid political drama, such machinations are ultimately less important than whether or not market turmoil can be contained. It has been so far, but these are very early days.
For now, little changes in terms of the UK’s formal relationship with Europe. The government will wait until October at least to start the “Article 50” exit negotiation process that could take up to two years. This Wednesday, though, there’ll be an EU summit, without the UK, to discuss the implications of Brexit. For all the bluster and posturing, I reckon the remaining EU big beasts will ultimately attempt to placate the EU, not treat us as a pariah. An aggressive stance could ultimately encourage others – Holland? Finland? – to hold copycat referenda. And if the UK can vote Leave, why not them?