“Brits Don’t Quit!”
-David Cameron
The vote for Brexit is upon us, TODAY! And to boot, on Sunday Spain holds its second general election in the last six months to elect a government.
Regardless of where you stand on the outcome of these risk events, today’s interconnected markets do force us all to constantly absorb new economic, political, and social events around the globe, sometimes more and sometimes less, as they impact our investment portfolios. And this, of course, is what fuels what it is we do as global macro risk managers at Hedgeye!
Back to the Global Macro Grind…
Brexit risk has been on the table for a while – after all, UK PM David Cameron set into motion the Brexit referendum (to give Brits the decision to Remain or Leave the EU) back on September 1st of last year.
But will Brits actually vote themselves out of the EU? We’ll reiterate here that we expect the Remain camp to prevail, but as the aggregate “Poll of Polls” below shows, it’s a split race (50/50). In addition, recent results of individual polls show there’s a very sizable number of undecided voters, representing some 6% to 13%, depending on the poll, who we think will tip the balance marginally to Remain.
What Tips the Scales? From the outset, the referendum vote has been an emotionally charged one rather than one grounded in indisputable facts and figures.
Whether it’s Cameron and Co. banging the boards with “Brits Don’t Quit!”, stating that the UK is economically strong and safer in the EU to Eurosceptics running with “Take Back Control” and spouting the benefits of sovereignty from Brussels and checks on immigration, this referendum has not been anchored in pure logic, fact based decision making.
It’s grounded in behavioral psychology!
As we’ve noted in previous work, the behavioral economist Richard Thaler, in his book Misbehaving, helps us understand behavioral factors influencing the British voter:
“While loss aversion is certainly part of the explanation for our findings, there is a related phenomenon: inertia. In physics, an object in a state of rest stays that way, unless something happens. People act the same way: they stick with what they have unless there is some good reason to switch.” (Misbehaving, pg 155)
To our reasoning, there hasn’t been overwhelming evidence to switch course, and so we believe it follows that voters won’t choose to Leave. Inertia!
Below we offer additional emotional-based factors at play that we suspect will further sway the undecided voter to the Remain camp:
- Numerous perceived experts (from the IMF and World Bank to the Bank of England’s Mark Carney) have stated a strong case of economic harm if the UK leaves (coincidentally the “famed” investor George Soros recently said Sterling could plunge >20% on an exit). Experts, even if they’re wrong, can be emotionally easier to support.
- The very recent terrorist attacks in Orlando, Florida on the 12th of this month combined with the terrorist attacks in Brussels on March 22, 2016 are fresh reminders of the globe’s safety concerns, which dovetails nicely with Cameron’s forceful and repeated messaging that a UK in the EU is safer than one out.
- Politically, we do not suspect the country is willing to risk a political power vacuum over this vote, as PM Cameron would likely have to step aside if Brexit prevailed.
- The fear of the unknown looms large: yes, new trade agreements could be arranged across the globe, but at what cost, and how soon? The benefits and “ease” of the existing, established trade arrangements, especially with the EU as the UK’s largest trading partner, should stand front and center to support Remain.
- Unlike in the Eurozone, Brits have their own central bank and independent currency, which we think will marginally support Remain over Leave.
- Even the soccer star/celebrity David Beckham is vocally supporting Remain!
Positioning Set-up? Polls close at 10pm UK time so an indication of results could come late this evening eastern time, with a decision reached by early tomorrow morning.
The GBP/USD has been whipsawed by the referendum and has gained ~+4.5% to $1.4905 (its strongest level in five months) in the last week alongside the Remain camp gaining a slight advantage in polling, rising a full +1.3% intraday. We expect a Remain decision to move the GBP/USD slightly higher, yet believe the bulk of the move has already been priced in.
And should Leave prevail, look out below!
Further, we believe European Stocks are about to make another lower-high within their bearish @Hedgeye TRENDs and that our 11-month old tendency to stay with our local and global #GrowthSlowing call will Remain.
Spain to the Polls, Again!
Moving south on the continent, Spaniards are set to go to the polls on Sunday, and with it create another political “event” on the continent this week!
The rub this time around appears similar to when Spaniards went to the polls in December 2015:
- There’s a lack of trust in Mariano Rajoy, leader of the Popular Party that currently leads in polling, as he has tolerated corrupt officials and dealings under his leadership as PM, and
- There appears a high likelihood that the political parties will once again not be able to agree to form a viable, strong majority coalition.
Current polls suggest the conservative Popular Party (PP) garners the most support at 29%, followed by the anti-austerity Unidos-Podemos (26%), the Socialists (PSOE) at 20.5%, and the liberal Ciudadanos party with 14.5%. As our special economics contributor and Spanish national Daniel Lacalle (who will appear on tomorrow’s Macro Show) has also highlighted in his research, the risks for the coalition appear as follows:
- The vast majority of Spanish citizens will vote for moderate, center parties (PP, PSOE, and Ciudadanos)
- Neither (PP + Ciudadanos) nor (PSOE + Podemos) will reach a clear majority
- A Grand Coalition (PP + PSOE + Ciudadanos) appears unlikely to form
Will this time be different? We suspect the answer is no, and therefore another hung parliament is likely. And so this political instability should lead to more economic instability and further support our #EuropeSlowing macro theme.
Our immediate-term risk ranges (with intermediate-term TREND research view in brackets) are now as follows:
UST 10yr Yield 1.55-1.75% (bearish)
SPX 2058-2105 (bearish)
RUT 1125-1170 (bearish)
NASDAQ 4 (bearish)
Nikkei 157 (bearish)
DAX 91 (bearish)
VIX 16.38-23.06 (bullish)
USD 93.13-94.88 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 103.08-106.60 (bullish)
Oil (WTI) 46.18-50.72 (bullish)
Nat Gas 2.45-2.82 (bullish)
Gold 1 (bullish)
Copper 2.01-2.16 (bearish)
