JAMES CARVILLE is surely to blame. As political adviser to Bill Clinton, he joked that he would like to be reincarnated as the bond market, because “you can intimidate everyone”. The idea is that pressure from the markets tends to curb reckless economic policy. Carvillists think that the prospect of a hard Brexit will prompt panic-selling of bonds, shares and the pound, a rout that would bring politicians to their senses. This seems a forlorn hope. It is far more likely that the markets will be cowed by politics than the other way around.
If the House of Commons on December 11th votes down the Brexit deal agreed with the EU, the pound will probably fall. The price of gilts, as British government bonds are known, would rally as investors seek a safe haven. The share prices of firms most heavily exposed to the domestic economy would fare badly. But a cheaper pound might push the overall index of leading shares up, because many of the largest firms get much of their profits outside Britain. A weaker pound would make it cheaper to buy a stream of global earnings.
Yet it seems likely that prices would move only modestly. Really big moves would require investors to believe on December 12th that a no-deal Brexit was now a certainty. Why should they think so? Many things could happen before March 29th to mitigate, forestall or postpone such an outcome. Few hedge funds would be willing to short sterling—borrow pounds so as to sell them in the hope of buying them back more cheaply later. If the political winds suddenly changed, the pound might surge, leaving them out of pocket.
Say, for the sake of argument, that investors came to the conclusion that a no-deal Brexit was now more likely. Sterling might then conceivably fall by 10% or so. But what would put a floor under it is that the pound has already fallen a long way since the Brexit referendum in June 2016. Before the vote was in, sterling was trading at $1.48. It now buys $1.27. There is already a fair bit of Brexit bad news priced into sterling. The same goes for British stocks.
Carvillists draw a parallel between the parliamentary vote on the Brexit deal and passage through Congress in 2008 of the Troubled Asset Relief Programme, or TARP, a bail-out for America’s banks. The TARP was at first voted down. The stockmarket promptly fell sharply. Then, four days later, Congress voted in favour of it. It is not a perfect parallel. When the TARP vote was taken, many feared that banks would fail and the financial system would break down within days. In Britain, by contrast, Brexit is still months away. And in the otherwise gloomy picture of a no-deal Brexit recently drawn by the Bank of England, it was made clear that banks would still function, even in the worst-case scenario.
Investors know that most of the electorate, and the bulk of MPs, do not favour a no-deal Brexit. So they are unlikely to panic prematurely. If, as March 29th approaches, there is still no deal in place, investors will grow nervous. Things are likely to be messy. But the markets are more likely to be the bullied than the bullies.