Markets got the US election and Brexit wrong in 2016 and are none the wiser in 2020
- ‘Soft’ issues like social cohesion have become critical to political and economic stability but are hard to gauge
- Yet that has not stopped investors from betting on politics, in the hope of making a profit
Investors have also found the twists and turns of the Brexit saga awfully difficult to trade, causing sentiment towards sterling to oscillate between periods of complacency and overreaction.
Having failed spectacularly to anticipate Britain’s decision in 2016 to vote to leave the European Union, currency traders continue to be misled, often selling sterling even though the risks are overblown, then buying the currency when the calm is deceptive. This is why the renewed sell-off in the pound – it fell 2 per cent against the US dollar on Monday and Tuesday, extending its losing run to the longest since June – is cause for concern.
Either Johnson’s proposal, and his threat to walk away from the talks if no deal is in place by mid-October, are part of his customary brinkmanship, or he has decided that a clean break with the EU is a political and economic price worth paying. If it is the former, then markets are again overreacting. If it is the latter, then investors are mispricing political risk in Britain almost as egregiously as they did four years ago.
In a sign of how vulnerable the pound is to further selling pressure in the coming weeks, speculative positions in sterling futures are back in positive territory, according to Bloomberg, revealing the extent to which sentiment has improved despite the clear risk of a no-deal Brexit.