It seems the U.K. is going to get its Brexit. Boris Johnson appears to have confounded the doubters that believed he would flip-flop after he got into number 10 Downing Street and has pulled the pin.
By proroguing Parliament (formally dissolving the session), he has cut off the appalling chaos that previously successfully kicked the Brexit can down the road. This process of trying to pass the blame for no-Brexit to others, rather than face getting sacked by the electorate, is now crystalized down to a few days before the Brexit day. It may silence the debate entirely because an election is likely to follow soon, putting a gun to the head of almost all elected politicians who face losing their position if they come out definitively against Brexit in the short window available.
Proroguing Parliament is an extreme move, one for an extreme situation.
The media wants to and has suggested the financial markets were shocked but the truth is the British pound dropped just 1% and the stock market traded on as if nothing has happened.
This is the pound’s reaction versus the euro; the dollar reaction is even less. Yes, there is a move but a 1% fall is barely a twitch so the recovery later can also be regarded as noise.
Action on the London stock exchange is basically a null and there is nothing dramatic to see as democracy is suspended and a complete upending of the British economy becomes an odds-on probability.
If the market is right, then the hard Brexit damage predicted is already done and priced in. There is a tiny chance the market knows of a secret no-Brexit option that is locked in, but that’s incredibly unlikely as is the possibility the whole country is in an extreme state of denial of the consequences.
Today’s market action says a highly likely hard Brexit is not going to be so hard after all. This seems incredible, but there it is, a market populated by trillions of capital that is saying, “U.K. hard Brexit, we aren’t worried about that.”
This is sobering on many levels because right or wrong the outcome will call many assumptions into question. Markets aren’t meant to get these things wrong. If the market does misprice Brexit, that will demonstrate something very broken in the equity markets. That will be a bad omen for markets and economies across Europe. Malfunctioning markets mean malfunctioning economies.
Instead, if the market is calling the impact of a hard Brexit correctly it will cast shade over the European project as a whole because it will signal there is little short/medium-term benefit for the EU at all. Of course the whole point of the EU was to end the perpetual war that roiled Europe for 1500 years, but nobody really considers European War a serious issue anymore even though the last wicked European War was only ended 18 years ago and one is simmering on its borders in Ukraine right now.
Will Europe fold on its hard line, “no renegotiation” stance, now that hard Brexit is in the home straight? If it does then Europe is surely in trouble because then there will be a queue for EU secession and that would likely pull apart the European experiment. Instead the EU will likely try to prove the markets wrong and make an example of the U.K. and try to deliver a living proof of why being in the EU is great and being out is terrible.
Whether they can pull that off is anther matter; the markets say no.
Let’s hope the markets are right.
In 2018, Chamber won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards.
U.K. Goes Prorogue, What Does That Mean For Markets? – Forbes