Referendum Eve into Morning After

June 23, 2016

00:34 GMT–  With 13 of 382 British localities reporting, the Leaves lead the Remains by a 7 percentage point margin of 53.6% to 46.4%.  Too be sure, these are early times, but nervous markets have backed off Thursday’s high confidence.  Supposing the Leaves prevail at the end of the day, a few conclusions one might draw are these.  First, it’s more risky to base assumptions about an election on precedent than it is to do so with economic trends.  The polls always suggested the contest could go either way.  But so did the Quebec separatist referendum of 1995 and the more recent vote in Scotland on whether to stay in the United Kingdom.  Every election is a wholly different animal with different people participating and with different contexts.  Second, tragedy doesn’t turn tides always.  Lyndon Johnson was able to enact the liberal agenda of 1964-65 in part because of the widespread national desire for Jack Kennedy to not have died in vain.  Jo Cox’s murder may exert a more fleeting effect.  Third, a Donald Trump presidency looks far more plausible today than yesterday, since immigration lies at the ideological core of his supporters and the British Leaves.  And finally, nothing should surprise people anymore in a world that seems to have dived down the rabbit hole.

02:00 GMT– The first 86 localities to be counted shows a race possibly headed for a photo finish.  50.1% support leaving the European Union, and 49.9% prefer to stay.  For such an important question to be decided by such a thin margin is a ludicrous way to run government policy.  Which ever way the decision goes, if the margin is smaller than 1 percentage point as it is at the moment, it will lack any sense of legitimacy.  If the Leaves get the win, there will be enormous change, clearly not all implemented immediately but just as assuredly a change that will be forever.  If the Remains edge out a tiny victory, Britain will not come together around that decision.  Politics will be even more unworkable than it’s been.  Confidence in Britain as part of Europe will wane, and the nation’s living standards will still likely decline.  There will be more referendums down the road, as the population of eligible voters inevitably turns round and round.

03:35 GMT– Make room for the fat lady.  Prime Minister Cameron’s gamble now looks like an enormous miscalculation.  With 262 of 382 localities counted, the Leaves hold a 3 percentage point lead, 51.5% to 48.5%. Betters earlier today saw a 3 in 4 chance of remaining in the EU but have reversed that to a 70%+ likelihood of Britain moving on without ties to the EU.  Markets, too, are stampeding out of European currencies and stocks for safety in the yen, gold, the dollar and Treasuries.  Cable has plunged as much as 10.4% $1.3464 from $1.5019. The dollar also has gained 3.7% against the euro and 1.9% against the Swiss franc but is 4.5% weaker against gold. At 1.52% futures trading in the 10-year Treasury is down 16 basis points, but 10-year sovereign debt yields have risen 6 basis points in the U.K. and 3 bps each in France, Switzerland and Germany.  The Nikkei has lost 3.3%, and stocks have dropped 3.0% or more in Hong Kong, South Korea and Australia.  The Leave supporters will of course dismiss today’s volatility as a temporary and inevitable spasm by a market forced to accept big change.  Those who counseled against leaving the EU, and this included most businessmen, politicians, and economists, the question is whether the world might be looking at another Lehman moment.

09:25 GMT– From the outset of returns and increasingly through the night, the verdict of British voters was that a determined, albeit narrow majority, want their country to leave the European Union.  Final figures reveal a voter turnout of 72.16%, with 1,269,500 more people selecting Leave than Remain.  The Leaves comprised 51.9% of the final count to 48.1% for the Remains. The margin of victory, representing just 0.0171% (less than two one hundreths of one percent) of the world population has set in train a chain of events that may change the planet as we know it.

The immediate repercussions are that British Prime Minister Cameron has resigned but announced that the step down will occur in the fall.  His successor, presumably a Brexit prime minister, will oversee a 2-year process of departure from the EU by triggering the first use of Article 50 of the EU Treaty covering procedures for a member to leave.  It is expected that many banks and other companies with employees and regional headquarters in Britain will relocate such operations to Continental Europe.  Bank of England Governor Mark Carney said the central bank has 250 billion pounds in existing facilities to address financial market turmoil and will take other actions in time to counteract turmoil.  The European Central Bank, in turn released a statement pledging to “closely monitor financial markets and continue to fulfill its responsibilities to ensure price stability and financial stability in the euro area.”

There have been huge market adjustments.  In Britain’s case, the Ftse fell 4.8%.  The 10-year gilt yield tumbled 30 basis points to 1.07%.  Sterling recorded its largest single-session decline and touched a 31-year low against the dollar.  Other stock markets show losses of 7% in Europe overall, 7.6% in France, 6.3% in Germany, 14.6% in Greece, 9.9% in Spain, 10.5% in Italy, 6.2% in Portugal but 2.6% in Switzerland.  Japan’s Nikkei lost 7.9%, partly reflecting an upsurge in the yen.  Stocks dropped 2.0% or more in Hong Kong, South Korea, India, New Zealand, Taiwan, Australia, Singapore and Thailand.  Some 10-year sovereign debt yields increased sharply like that in Greece (+91 basis points), Portugal (+26 bps) and Spain and Italy (+11 bps each). Others dropped considerably:  U.S. (off 22 bps), Germany (-18 bps), France (-11 bps), Australia (-24 bps), New Zealand (-22 bps) and South Korea (-12 bps.  The dollar fell against the yen but rose against European monies.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission. 



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