It’s June 23 and what had to be said has now been said, much of what needn’t have been said was also said but, in my humble opinion, much of what needed to have been said was left aside. Now it is up to the voters.
Over the past weeks I have had more conversations on the subject than I have had hot dinners and all that I can take away is that there is a significant amount of “my heart says out but my head says in” about and that in the final analysis the latter will prevail. If it does, however, it still leaves a tidy majority of people not being comfortable with this country’s membership of the union after having voted to remain against their better instincts.
That said, and despite the way markets are trading, the Remain vote is not a done deal. I know the pollsters have a terrible record but the bookie community, the touchstone of markets, got the general elections of 2015 just as wrong as did the opinion polls. My chum James Carey who fights the good fight for the Royal Bank of Canada nailed it on his Facebook page when he observed last night that “whichever way you vote tomorrow, the sun will still come up on Friday and the world will look very much like it did today. Enjoy!”.
On the whole, and no more than that, the debate has been level-headed and I have been impressed by the way in which even simple people have made the most strenuous efforts to get their head around the arguments and to come to a considered conclusion.
Sterling
Yesterday was a nothing day with about as much liquidity as the Sahara desert at noon. The sole upside was a little joke which did the rounds and went: “The England Football team won’t be participating in the referendum as they can’t find the box but, more to the point, even if they could they wouldn’t know how to put a cross into it….” Wry smile, even from me.
Much has been made of the way in which cable hit a six-month high yesterday and we open this morning at just below US$1.48. Just to put this in context, the low was marked in February at just below US$1.39 and the 12-month average rate is US$1.4880. The euro cross, perhaps more pertinent in the context of the referendum, is at €1.3030 this morning against an April low of €1.2370 and a 12-month average of €1.3410. The really keen pundits, however, are looking at the sterling/yen cross as buying the Japanese currency is regarded in forex circles as the ultimate flight to quality trade. They might think that but I couldn’t possibly comment. Or could I?
Overnight we were treated to the preliminary Japanese manufacturing PMI for June, which read 47.8. This might be 0.1 point better than the May reading but it is still the fourth month on the bounce that the figure has indicated a contraction. Given that the BoJ opted to leave monetary policy unchanged last week, some form of easing has to be expected soon. Since January 2014 we have had only three individual months in which the reading has been below 50 and now we have four in a row. The authorities have undertaken bold monetary moves for a lot less than this. The rising yen is not what they’ll be wanting to either see or condone. Having pushed it down to ¥125 under Abenomics, seeing it back at ¥104.40 will be pleasing no one. If Britain votes Remain, you’ll want to be as short of the yen as you can get with a possible target of something around ¥115.00, and woe betide those who try to stand in the way.
Meanwhile and while contemplating the whichness of the why in yesterday’s sleepy markets, I was made aware of Article 4(1)(38) of Mifid II. Does anybody recognise that? It reads: “’matched principal trading’ means a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is never exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction”.
It’s been there for a long time for all of us to read. Fact is that fixed income markets in general and the credit markets in particular are driven by principal or agency and not by commission broking. The reason they are like that is simple. The commission model doesn’t work. If it did, it would have take root years ago. I must re-read Mifid II to see where I can find the bit that assures us that the sun rotates around the earth which is, apart from anything else, perfectly flat. Mifid must have been written in six days and on the seventh they did rest.
I know I shouldn’t be saying this but I’d love to see a Leave vote tonight, if only to watch the artificial construct that authorities have made up and call a market being tested to destruction and failing. I spoke to a money manager on the east coast last evening and asked whether they would be manning the desks around the clock. The reply was something along the lines of them having chosen to have some presence but not really wanting to try to trade into the gaps that will inevitably appear. As the man told me, most big sellside firms have sent out messages advising that they too will be in but not to expect them to be making markets in anything less liquid than a Starbucks venti-sized skinny latte.
Portugal
Finally back to our old friends in the garlic belt. Both the ECB and the EU Commission are urging Portugal to step up its efforts to combat the structural deficit. This reminds us that, while all eyes have been on the UK and its debate on the merits and demerits of EU membership, the fiscal fiascos in the PIGS are far from being resolved. Rampant unemployment, struggling public services and wobbly fiscal revenues and excessive public sector debt combine to create a toxic mix that sadly cannot be resolved by “political will” alone.
France is facing another day of protests before the severely watered down labour market reform package continues its progress through the legislative process. Isn’t it great to protect labour markets of which one in 10 of the population isn’t a member? Where do minority rights come in to the thinking of greedy little CGT officials eager to protect their little patches? Where has the right to work gone?
Some people in this country have argued that a vote to Remain will make little difference as the union’s gas tank is as good as empty, that it is already running on fumes and that it might be better not to find oneself accused of having pushed it over the edge; in time it will fall anyhow. I don’t know but I’m not sure the northern Europeans will want to see their national finances beggared while finding out. As has been said by people a lot smarter than myself, today is not the end of a process but the beginning.
I, incidentally, and not until after a considerable amount of thinking and worrying, have voted to leave. Trust me, I know how high the cost of a divorce can be but that doesn’t mean that I’m not a great deal happier for it.
Good luck trading the gaps.