MorningWord 6/29/16: Why Are You Still Here?

by Dan June 29, 2016 10:01 am • Commentary

Leader of the U.K. Independence Party and guy who led the charge for the Leave vote, Nigel Farage, took his Muppet Show on the road to EU headquarters in Brussels yesterday. Farage agreed to an interview with CNBC’s Wilfred Frost because there was a tv camera. He also sported the biggest shit-eating grin I have ever seen. Watch here:

Farage was clear that the vote in favor to Leave the EU was a victory for the “little people” against the “multi-nationals, the Goldman Sachs’, big Politics”.  It was certainly a momentous victory considering all that’s about to unfold based on such how narrow margin of victory (~52% to 48%).

But Farage’s inclusion of Goldman Sachs as someone finally getting pay back from “little people” is a tad curious.  A key pillar of the Leave position was to restore London as the financial capital of the world by doing away with EU regulations.  Listen to Farage’s rhetoric about why UK banks fared so poorly in the aftermath of the Leave vote, how poorly run they have been, but the amazing opportunity they have to re-emerge as a global power:

And that last bit, where he pleads to “end this complete rubbish” relating to the downward volatility in risk assets as a result of the vote. Farage points to FTSE’s  3% rally yesterday (it’s up another 2.3% today), and calls out the media for its “scare mongering nonsense”.  Albeit, that is coming from someone who largely fear-mongered his way to a Leave victory.

The fact is just 52% of UK voters were allowed to trigger economic anarchy. The fact that the FTSE is back above last Thursday’s close is irrelevant. No one knows what comes next. The only certainty over the next few weeks/months until Article 50 is triggered, setting in place the 2 year process for the UK to negotiate their exit from the EU, is that uncertainty will reign. Financial markets don’t like uncertainty, especially those that carry contagion risk.

I’ll leave you with this, a couple of tweets, one from me this morning and one from CNBC’s Melissa Lee from Friday. The price action by global banks (for basically all of 2016) has been and continues to be troubling, and until very recently have priced little in for a UK exit from the EU.

Even before Brexit there were other forces at play like the current rate environment, regulation, exposure to emerging markets, and global growth (or lack thereof). Now we’ve added Brexit contagion across the Eurozone to the list:

Drahgi, Merkel and Juncker don’t have a Bazooka for what comes next. If the EU goes easy on the UK they will only encourage others. And if they punish the UK they somewhat punish themselves as well.

And don’t look to this side of the pond for much help. The U.S. Federal Reserve is looking fairly impotent at the moment, especially when you consider some of the same political forces are at play here in the U.S. until at least early November.