Sterling, surprisingly robust through the campaign, finally took fright on Friday morning, with bonds tumbling too. Given the markets’ already fevered mood, the reaction is understandable.Yes, there were some hairy moments in the morning. But by the end of trading things weren’t so bad:
1. Although the 10-year gilt-bund spread is at a five-year high, this is largely because bund yields are so very low. The gilt-Treasury spread is quite normal. And the level of 10-year gilt yields, at 3.84 per cent, is lower than it was two weeks ago. The cost to the tax-payer of government borrowing - which is what matters most - is therefore still low by the standards of recent years.
2. Sterling’s “fright” has caused the trade-weighted index to drop to….a six week low; it‘s held up because of the weakness of the euro.
Yes, it fell 2.9 cents - 2% - against the dollar yesterday. But this is not really an extraordinary move. Back in February I estimated in my day job that, since 1993, the £/$ rate’s annualized volatility has been 9.4 per cent. That means yesterday’s fall was a 3.3 standard deviation event. But because FX markets - like other asset prices - follow a cubic power law, this is not a freakish event. It’s a 0.5% probability - the sort of thing that we’d expect about 1.3 days a year.
3. Although the All-share fell 2.8 per cent - a 2.2 standard deviation event given long-term annualized volatility of 20% - it actually out-performed the CAC and Dax. That’s hardly a vote of no confidence in UK assets.
From any adult perspective, then, yesterday’s moves - as measured at the end of the day which is what matters now - were not especially frightening.
Now, you might object that this is because the markets still hope for Tory cuts. Or you might reply - not exclusively - that the markets are just "chimp-thick". And it could be that there’s worse to come, especially if global investors remain risk-averse; as I‘ve said, sterling is a risk asset which falls if global equities fall.
Whatever. The fact is that the hung parliament has not - so far - produced an extraordinarily adverse market reaction.