The markets have spoken, and they couldn’t care less


8:48 am - May 11th 2010

by John B    


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One of the reasons continually cited by Tory commentators for why we need to get the election resolved Quickly, and with a Committed, Majority Coalition Government Of Only Two Parties (which, entirely coincidentally, could only consist of a Lib/Con pact), is that of The Markets.

The suggestion is that, if we don’t have a strong, firm hand on the economy wielded by, erm, an ex-PR man and a scary manchild, then The Markets will punish us. In this sense, The Markets are rather like God: if they do exist, it’s certainly not in the kind of interventionist form that the tossers who invoke them to bolster their own political power claim they do.

The evidence for my claim is simple: none of the events of the UK political campaign or the election’s aftermath have had a significant impact on the value of the UK pound against the two other most important global currencies.

The chart below shows exchange rates (ie the value of a pound; higher is ‘better’ in the eyes of the sort of people who rant about this sort of thing, which is debatable but an argument for another day) from the start of 2010 onwards – i.e., the period when the expected election outcome shifted from a Tory majority government to “meh, don’t ask me, I only work here”:

GBP/EUR/USD rates from Jan-May 2010

In words, the only noticeable trend is that the GBP lost ground against the EUR up to mid-February (still pre-Cleggmania) and then stayed more or less flat, while there was no impact at all of the uncertainty on the US$ rate. So, what about the election itself? Well, this chart runs from April 21 to today:

GBP/EUR/USD rates immediately prior to May 2010 election

Yup, that’s right: bugger all against the dollar, a tiny fall against the EUR (which was mostly driven by the vague agreement on Greece’s bailout, but that’s another story that’lll keep). There’s nothing that reflects any serious concerns by The Markets about the value of the UK’s currency.

I’m not going to go into bond yields, because they’re complicated. But what we do know is that the UK’s debt is denominated in pounds, so there is no prospect of default – instead, the government can always print more money. So any perceived risk to UK bonds solely consists of currency risk (you’ll always get GBP10 million back from your GBP10 million bond, but GBP10 million just might only be worth USD2.50 at the time).

So if The Markets believed that the current election bargaining meant that there was a serious risk the UK wouldn’t pass a budget, make the required cuts to bring the deficit down over a reasonable time period, and so on – in short, if there were any real financial risk posed by any of the possible electoral combinations – then the pound would have fallen rapidly already, both because it’d hit the economy and because the only way to deal with the debt without cuts is devaluation.

Now, let’s get back to the politics.

The system is completely and utterly unstable, as unstable as it could possibly be, anyone staking more than they can afford to lose on the identity of the next PM would be a raving idiot – and The Markets couldn’t give a rat’s arse. They know that, whatever happens (my money’s on a minority Tory government, but not very confidently), the leaders of the main parties will instruct their MPs to vote in favour of a budget that allows the debt to be serviced, and enough of them will agree to get some kind of budget bill passed that keeps us from going Greek.

So anyone using The Markets as a justification for a Lib-Con pact, or indeed as justification for anything other than enjoying the current glorious Westminster farce, is doing so for political reasons. Now, why might the kind of people who’re normally taken seriously as commenters on The Markets talk up the Tories for political reasons…?

Look away now if you don’t want to know the shocking, unexpected answer.

Because if you work in financial markets, you have a much higher than average propensity to be a rich selfish bastard; and if you’re a rich selfish bastard, you have a much higher than average propensity to support the Tories.

This has been another round of Simple Answers To Simple Questions; see you next election (which, I’m estimating, will be when the Tory party tears itself apart over Europe in about 18 months’ time).

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About the author
John Band is a journalist, editor and market analyst, depending on who's asking and how much they're paying. He's also been a content director at a publishing company and a strategy consultant. He is a regular contributor to Liberal Conspiracy and also blogs at Banditry.
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Story Filed Under: Blog ,Economy ,Elections2010

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Reader comments


It is interesting that Paddy “I’m not going to tell you which coalition I would prefer” Ashdown said on Today this morning that the LibDems and Conservatives will not be able to exist in coalition because the Conservative party are “rabidly Eurosceptic”.

@1, yes, Paddy’s good on the understatement, isn’t he?

Good article,

There is also the question of economic competence. All weekend Tories claimed that there would be a tsunami in the markets on Monday. The fact that there wasn’t, indeed rather the opposite, makes one wonder why they should be trusted with the economy.

An excellent point made by John B.

We’ve had our disagreements in the past but here you are absolutely spot-on.

What the bible belters of the UK press pretend not to notice is that exchange rates fluctuate. Sometimes they go up a bit and sometimes they go down a bit. They always have done and always will.

Except that since May the 6 as soon as there’s the slightest slide, our rabid hysterical tabloids decided to swallow a few tablets of speed and write apocalyptic pieces about The Markets not liking anything that isn’t a ameron government.

With all that stuff in the lead up to last Thursday about the finance markets opening at 1am on Friday morning, I’ve been looking everyday since to see if the sky is falling in, as was predicted. But nothing, not even with the market turmoil over the fiscal deficit of the Greek government.

Mind you, the political rhetoric in the media is getting close to saying: Look at mess the stupid electorate has created by only giving the Conservatives 36% of the total vote. You’d have thought they would know by now all would know what’s in the national interest – strong and stable government.

Of course, no one has mentioned that the likes of Hitler, Stalin, Franco, Honecker and Salazar provided strong, stable government.

For a taster of what strong givernment could bring, try this full text of a draft memo setting out Conservative attitudes towards Europe headlined “Draft letter from Foreign Secretary to Prime Minister”
http://www.guardian.co.uk/politics/2010/may/09/tory-eurosceptic-letter-william-hague

Great article. Does anyone really think Clegg can side with the Tories? I think it is going to be a neutered Tory minority government coming our way and a second general election in the autumn. Plenty of time to have a real contest in the labour party. I have to say well done to Gordon Brown in denying the Tories a win, Gordon never stood a chance against a rabid and vile right wing assault by the Tory press and now he has bought us time time to regroup. All in all perhaps the best result I could have hoped for in the circumstance considering they were so far ahead in the polls not to long ago.

Another article about the markets from someone who doesn’t understand the first thing about said markets….

Firstly, get your charts right, with a proper scale so you can actually see the moves. Also, you might want to extend your historical chart back a while, to show when GBP/USD was back over 2…..we already have had a massive fall in sterling thanks to Labour’s massive budget deficits.

You might also want to get your idea of currency risk the right way round…at 2.50 to the USD sterling would be *strengthening*.

But the real *political* point is this;

Labour have run up a massive budget deficit, and were running large deficits since 2001. Much of their voting electorate work in the public sector or enjoy some form of benefits. To cut the deficit to zero the UK is going to have to cut about £50bn each from the welfare bill and public sector pay and pensions. The market isn’t stupid, and know that turkey’s don’t vote for Christmas….so the chance of Labour actually managing to push through any significant spending cuts is minimal – especially if the have to indulge in pork barrel politics to keep a ainbow coalition together.

At the moment, people still expect a Tory government, which will be more likely to deal with the problem….and that problem is getting worse. With the new European stabilisation fund, WE are now dreadfully exposed.

8. gareththegeek

Right On!

9. Luis Enrique

Tyler,

I’d turn down the attitude if I were you, you just make yourself look like a prick.

1. the article is about market reaction to the recent political uncertainty, the days when GBP/USD was back over 2 are not relevant*

2. The y-axis scale is perfectly suitable to show that exchange rates really haven’t moved around much.

* and attributing the fall in the £ solely to govt. deficits has no justification. Why not consider the self-immolation of the UK’s main export industry: banking? Or the possibility that the $ was undervalued back then and has since recovered, as opposed to seeing it has the £ having fallen from it’s “right” value.

@9 LE

The scale makes it look as if almost nothing has happened, when in fact we’ve seen large moves in sterling.

When sterling was over 2 IS relevant, as is pretty much all the time since the start of the crisis….the market pried in a Tory victory a long time ago, and the sterling weakness was primarily due to budget deficits. Our banking industries aren’t a cash export I’m afraid, so have little effect on the price of sterling.

Sterling has fallen against a trade weighted basked of currencies, not just against the USD, which as you say was a bit on the weak side. Basically, GBP has fallen against everything out there, by a large amount (~25%)

@John B – is it just me, or are the labels on your charts mixed up?

You’ve got GBP/EUR in red on the first chart (@1.60 falling to 1.50) and in blue on the second (mostly steady @1.175) – or am I colour blind?

I like the article, but disagree with the blanket statement: “the markets… couldn’t care less” – in my view, they care a whole lot less than the Tory press is claiming (and are driven by other factors, notably the Euro bail-out), but they still care.

12. Luis Enrique

no Tyler, it’s relevant to the argument you have having in your head, not the point the OP is making. And we plainly have not seen “large movements in sterling” because of the recent political uncertainty, otherwise see those graphs up there? The lines would be wiggling around a bit more.

Tyler is broadly right inasmuch as over the past 18 months the markets have demanded a higher expected return from UK assets.
(Lower price = higher expected return).
Thankfully this has come in the form of lower sterling rather than lower gilt prices (higher funding costs) – which would not (could not) have happened had we been in the euro (Mr Clegg) – the one big thing GB got right.
Indeed we would certainly now be one of the “PIGS” – though I suppose the acronym would have had to be different – if we had joined.
On the main post it’s probably a bit too early to tell what the markets think.
Yesterday’s $1trn bailout – oh how the Germans must love the euro – was rather more important than our shenanigans.

14. Luis Enrique

further to J

yes the markets care – they’ll care a whole lot if it starts looking like the UK isn’t going to get it’s public finances in order. But unless you believe the markets think there’s no chance of a Lib Lab coalition or a Tory minority govt, it looks like the markets think whoever is in power is going to do the necessary. Hence the markets don’t care (much) about the political uncertainty.

(and yes, the graph labels are wrong)

I suppose that’s why sterling moved around 4% between thursday and friday last week? That counts as a large move. The last 2 years have seen almost unprecedented volatility in currencies, and the move we’ve seen in sterling has been BIGGER than when in fell out of the ERM.

You can’t see that on the scale John B has used. Seriously now….did no-one teach you how to mark a scale in maths lessons at school?

@ 13 cjcjc

You’ve got it completely right there – the Euro bailout definately overrode any market worries about the UK election results….but the problem is that now that is settled the UK is coming further into the crosshairs.

People are thinking that with a weak rainbow losers coalition, we won’t be able to cut the deificit yet can’t enjoy the Euro bailout fund’s backing….which suddenly leaves us very much more exposed.

17. Luis Enrique

look, the scale is quite adequate to show that USD/GBP has not moved outside the bounds of 0.60 to 0.68. In the last week, it has stayed within 0.65 and 0.68.

if that fits your definition of “large moves” that indicate the markets are shitting themselves about sterling, fine.

Is it not also reasonable to characterise a Con / Lib pact as an alliance of losers? Given that neither party actually, err…, won?

Not sure why you are converting to USD/GBP when the whole world uses GBP/USD but i’ll go with it….

0.60 to 0.68 is a 13% move…which is bigger than the move after GBP fell out of the ERM.

13% in currency terms is simply massive. I’m sorry, but you are simply wrong on this one…

20. I've been trolled

“Because if you work in financial markets, you have a much higher than average propensity to be a rich selfish bastard; and if you’re a rich selfish bastard, you have a much higher than average propensity to support the Tories.”

Ooh, nice trolling! But [citation needed] on that.

Does a belief in capitalism make you selfish? Does it make you support the Tories?

I believe in capitalism. That’s because I believe in its power to redistribute wealth fairly and thus create a better, more equal society. And I hate the Tories. Tory support isn’t down to selfishness, it’s habit, i.e. the same reason Brown got so many votes.

21. Luis Enrique

this is getting boring and also beside the point. I should have said the 0.60 to 0.68 bound was from 1 Jan 2010 to present. First, currency moves of +/-13% over 4 month periods are not so rare, Second, this volatility is about bank bailouts, QE, deficits, flight-to-dollar etc. etc. not about the f*ing hung parliament which is what the f*ing OP is about.

The scale is because I wrote this piece in an hour during a break from paid work, so downloaded the data and made a quick XLS without thinking about conversion conventions. I think Tyler was confused by my line about the national debt – I meant “if GBP 20 million were worth two dollars and fifty cents”, ie if we went Zimbabwegian. Otherwise, Luis has it spot on.

@20, I’m not getting at you. I believe in regulated, taxed, democratically accountable capitalism as the only way to deliver a decent standard of living for the world. It’s why I have massive bloody great fights with Claude (for example). What I’m saying is that people who work in the City tend to (not *all are* but *tend to*) subscribe to full-on Thatcherite Toryism far more than people of similar education levels and backgrounds who don’t work in the City, and conjecturing that this is due to the fact that working in the City means that you’ve decided to sacrifice work-life balance and job satisfaction in exchange for enormous quantities of money.

Very good article.

Incidentally, the BBC News channel was running earlier with ‘Hung parliament: markets down on uncertainty’. With the FTSE -1.65%. Is that why the CAC 40 is -2.1%, DAX -1.08%, FTSE MIB -2.22%?

Anyway, the reality is this. Sane market watchers looking at the Greek debt crisis will conclude the risk of a double-dip is real. In addition, there has always been a great deal of scepticism that a majority Conservative would either be able to find cuts in the here-and-now (and unthinking cuts may actually cost more than they save over the long term) or want to if indicators turn bad. In short, no-one was seriously expecting a comprehensive plan to tackle the deficit until Budget 2011.

Now, either a Lab-Lib coalition forms, succeeds and composes that Budget. Or it falls. Or there is a Con-Lib coalition, or it falls. Or a minority govt, or it falls. In *any* case, there is likely to be political clarity by the autumn and a firm hand on the books by March/April.

So long as there is a credible government with a programme ready to go, and a serious Budget, by early 2011, the markets will be getting what they (privately) probably believed was always likely in the first place.

Sorry, John. Disagree

FTSE 100: Thu close 5,261.00
FTSE 100: Fri close 5,123.00
FTSE 100: Mon close 5,387.40

Graph of previous 6 months: http://uk.finance.yahoo.com/q/bc?s=^FTSE

You can say it’s down to the Greek story and bailout, not the election – but those are pretty big and fast fluctuations.

@Matt Wardman

‘You can say it’s down to the Greek story and bailout, not the election’

Well, I’m afraid I would…

After all – take a look at this:

Thursday 6th (close): FTSE -1.52%, DAX -0.84%, CAC 40 -2.2%

Friday 7th (close): FTSE -2.62%, DAX -3.27%, CAC 40 -4.6%

Monday 10th (close) FTSE +5.16%, DAX +5.3%, CAC 40 +9.66%

There’s nothing in the performance of the equity markets to suggest the UK election had an effect on the general picture. The sensible players are taking a backseat.

We ought to remember it took a month for the CDU and FDP to reach agreement in Germany last year – and they had a majority and wanted to work together (and…er…look how that’s turning out).

Matt W: You can say it’s down to the Greek story and bailout, not the election – but those are pretty big and fast fluctuations.

It is in facvt very much down to the Greek situation than our election. Reading the WSJ this week – the Us focus is much more on Greek insolvency and how it might impact other countries than about where we are at,

Great article. I for one am tired of this “the markets will crumble!!1” meme doing the rounds, it’s almost as bothersome as the “we didn’t elect the PM!” bollox.

You can say it’s down to the Greek story and bailout, not the election

Or you could blame it on the weather, or the stars… Or you could accept that financial markets are in many ways chaotic, and that there isn’t necessarily a simple cause-and-effect chain in many of these movements. Sometimes stuff just happens.

29. Ramsay MacDonald

Committed, Majority Coalition Government Of Only Two Parties (which, entirely coincidentally, could only consist of a Lib/Con pact),

Not true. A Lab/Con pact would do that too.

The end of everything is clearly coming…I agree with John B.

🙂

@11, yes, labels on second chart are wrong – should be same as first chart. Will fix in the morning, it’s past midnight here and I can’t be bothered to fire up Excel and re-output and reload.

32. Richard W

10. Tyler

‘ Sterling has fallen against a trade weighted basked of currencies, not just against the USD, which as you say was a bit on the weak side. Basically, GBP has fallen against everything out there, by a large amount (~25%) ‘

To come up with the 25% depreciation you are taking as a benchmark the peaks when sterling was grossly overvalued especially the euro and USD Xs. The effective sterling rate which is the trade-weighted-index is 9% below the average 1970-2007, not the 25% you find using peak values.

13. cjcjc

‘ Indeed we would certainly now be one of the “PIGS” – though I suppose the acronym would have had to be different – if we had joined.’

In capital markets the acronym for the UK, France and Germany is F-UK-DE.

22. John B

‘ What I’m saying is that people who work in the City tend to (not *all are* but *tend to*) subscribe to full-on Thatcherite Toryism far more than people of similar education levels and backgrounds who don’t work in the City, and conjecturing that this is due to the fact that working in the City means that you’ve decided to sacrifice work-life balance and job satisfaction in exchange for enormous quantities of money. ‘

I am not sure how true the stereotype of right-wingers in financial markets is. I worked in Edinburgh (very conservative), short period in Singapore, London and New York and in my experience the people I worked beside were more liberal than the general population.

@ 32 Richard W

9% move in a trade weighted index is enormous, and the move isn’t greater ONLY thanks to the huge fall in the Euro, which has been beset by it’s own problems.

I would agree that most people in the city are pretty liberal….but they also deal with debt every day, and they know what it can do to a company or a country…which is why so many are against Labour’s management of the economy.

34. Peter Hill

The Markets do indeed seem to have acquired the aura of supernatural powers, while Economics is used by right-wing leaders as a kind of witchcraft – to compel consent in the authority of the High Priests. The people must perform the correct rituals, make the correct sacrifices – human or otherwise – or else the rains will not come, and the people will starve. To suggest any other explanation is blasphemous; to question the High Priests is heretical.
Thank you John, for this kind of heresy and blasphemy. We may need a good deal more of it over the next few years.

Well, bugger me. That wasn’t a very good prediction, was it? Re the Liberals, the selling f birthrights for pottage comes to mind. Oh well, at least the resulting government will be substantially less unpleasant than a Tory majority one would’ve been.

And I accept that City types tend not to be *socially* far-right, because despite all stereotypes to the contrary it’s not a job that’s possible to do if you’re actually completely stupid.

“Steven Major, head of fixed income research at HSBC, said: “The City would be reassured in the event of a Conservative deal with the Liberal Democrats. This has helped the market, but overall the markets have held up very well in the past few days, in spite of the uncertainty.””

http://www.ft.com/cms/s/0/229d3c40-5d3a-11df-8373-00144feab49a,s01=1.html

if we don’t have a strong, firm hand on the economy

Who’s “we”, Aussie ? Your government is led by Kevin Rudd.


Reactions: Twitter, blogs
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  3. Derek Bryant

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  31. Liberal Conspiracy » It’s time for left-liberals to join Labour

    […] by John B     May 12, 2010 at 3:57 am Well, I called that one wrong. My analysis was basically sound at a party level: there was nothing that either Gordon Brown or David Cameron would be able to […]





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