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Market Volatility Won't Be Contained to UK

Market Volatility Won't Be Contained to UK

By    |   Wednesday, 12 October 2016 07:29 AM

On the subject of political uncertainty, the state of the U.S. presidential race has started to take increased market relevance. Donald Trump’s statements have caused, to say it gently, rage at the Republican Party’s leadership and that has raised the possibility in the minds of investors that the Republican Party could lose control of both Houses of Congress. 

If that would be the case, that would create a very different policy scenario than the one we have known up to now and whereby the Republicans controlled at least part of the U.S. legislature under a Clinton presidency.

Of course we aren’t there yet and we’ll be only sure after the final election results are known.

Anyway it might be also good to keep in mind that a Democrat Congress does not guarantee a Clinton agenda.

One interesting angle is that if financial regulation becomes more significant, then that will serve as a course of central bank policy tightening that may lessen the pressure on the Fed’s two policy pillars, which are either the monetary policy or the quantitative policy.

That said, from the U.K. we got significant news whereby Prime Minister Theresa May had accepted that Parliament should be allowed to vote on her plan for taking Britain out of the EU. Mrs. May tabled an amendment to an opposition instigated motion to debate the government's "Brexit" plan, thereby effectively accepting the motion. 

However, Mrs. May also stipulated that there should be no attempt to block Brexit or “undermine the negotiating position of the government.”

The news that the U.K. parliament will be allowed to vote on the government’s plan to leave the European Union has given the pound sterling something of a tepid lift in Asian trading, but this doesn’t change anything to the fact that year-to-date the pound sterling is the worst performing currency against the dollar.

The U.K. financial markets are and will be subject to the uncertain effects of various political statements and that will not help foreign investment inflows into the U.K.

The problem is that as the U.K. runs a sizable current account deficit. Therefore, it is desirable that foreigners should actively wish to invest into the United Kingdom in order to maintain a stable currency, which is of course not the case for the moment .

Now, if foreigners wish to wait and see, that won’t be enough for having a stable currency. Waiting and seeing does not generate the capital inflows the U.K. absolutely needs. 

In the days immediately after the referendum vote when we had a 15 percent tumble in the value of the pound sterling, foreigners were 'then' prepared to give the U.K. the benefit of the doubt. There was a belief that other attributes of the U.K.; openness, diversity, skills, location, rule of law and so forth, would possibly compensate for the other uncertainties, at least as long as politicians did nothing to undermine these other attributes, and sterling found something like an uneasy stability at a lower level.

Then came the conservative party conference. The consequences of the U.K. exit were seen to be more significant, and perhaps more concerning was that foreigners were singled out for special treatment. 

The idea of investing in the U.K. in that kind of environment became less attractive and the desire to wait and see seems to have come over international investors, once again. 

Yes, sterling’s decline benefits exporters. It can raise their profits, but bear in mind that supply exchange in the modern world is so complex that most exporters need to import in order to export. It’s also worth bearing in mind that the U.K. as a current account deficit country, by definition, under this situation causes damage to living standards because of the higher costs of imports, especially commodities, that will outweigh the benefits of higher profits from exporting, at least for now.

By the way, Norway's sovereign wealth fund, which is the world's largest wealth fund and which is a major owner of British shares and government bonds, told Reuters that last Friday's flash crash was a correct move that reflected the expectations for Britain's economy.

Yes, food for thought and, unfortunately, volatility guaranteed and that will probably not be limited to the U.K.  

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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The idea of investing in the U.K. in that kind of environment became less attractive and the desire to wait and see seems to have come over international investors, once again.
investors, volatility, UK
Wednesday, 12 October 2016 07:29 AM
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