Brexit signs were there to see if financial markets had been less myopic

Today’s Brexit vote has shaken global financial markets (£/$ touching 30-year lows, safe haven assets like bunds supported while equities have tanked), prompted PM Cameron’s (impending) resignation and caused Mark Carney to stress that £250bn of liquidity is available and appear more open to further monetary easing (backing a little away from the previous “we could ease or tighten depending on the circumstances” stance).

But my post from earlier in the week argued that financial markets were substantially understating Brexit risks, as they slavishly followed betting market odds which risked not capturing the concerns of working class voters (who will likely be most adversely impacted by Brexit). Several factors also suggested that the presumed last-minute swing towards the status quo seemed substantially less likely than in the Scottish referendum: no last-minute bribes; brexit-loving newspapers; an ineffective labour market remain campaign; potential motivations to “teach Cameron a lesson”;remainers being less motivated to actually vote than brexiteers; likely lower turnout rates of younger voters than older ones. Conversely, markets were too relaxed about too close to call opinion polls.

My prediction that all hell would break loose in financial markets on a market-surprising Brexit has played out. We’re undoubtedly in for a bumpy ride in the days and months ahead, with political ripples set to spread and voters’ scepticism about 90%-plus economists thinking that Brexit would have severe adverse (international) impacts likely to be refuted.

Obviously I take no pleasure from having my fears confirmed – the UK economy is in deep trouble, with further BoE easing consequently likely. But it’s puzzling why financial market participants were so myopic i.e. not raising the bar as the referendum approached and not thinking more deeply about what the measures they track do/don’t capture. Perhaps they haven’t had pub chats with “normal” voters or have again fallen victim of their often herd-like behaviour.  No-one has covered themselves in glory here.


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