Can we have some perspective about the markets’ reaction to the election result? The Telegraph says there was “market chaos.” The Mail says it “sent financial markets into freefall.” Even Lex says:
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.
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.
It's good to hear a calm and measured voice pointing out a few facts.
But who was that weird guy Newsnight found last night to fill the Private Fraser role?
When he wasn't apparently on the edge of dissolving into manic giggling, he appeared to be insisting gleefully that "the market" (presumably some spirit guide that he keeps in a matchbox under his pillow) was on the point of hacking us into little pieces and flushing us down the toilet*.
* To be fair he did also seem to imply that this terrible fate might be avoided if we all said stuff this democracy lark, we want George Osborne and his smarter pals to hack off our limbs without delay and force them down the waste disposal unit.
Posted by: squirrel nutkin | May 08, 2010 at 04:49 PM
Friday's market turmoil had little to do with UK politics and much to do with the euro area's crisis. While the British press has been full of analysis of our political predicament (conclusion: we don't know what's going to happen), there was virtually no coverage of the European financial crisis. More evidence of our insularity or dumbing down (it's much too complicated to try and understand what's going on in the rest of the world).
Posted by: Econoclast | May 10, 2010 at 08:42 AM
@squirrel nutkin I completely agree with you. Sometimes the same facts, are best approached by an objective author that can present the facts in order for all of us to understand them and then be free to make oue own decisions.
Posted by: Fred Kapoor | May 18, 2010 at 12:07 PM