In the early days of discussions about what the UK would look like after leaving the EU, there was the economically comforting option of a Norway-style Brexit, where Britain swapped its pretensions of being a world power for the hygge of access to the single market. That was contrasted with the then-ludicrous idea of a no-deal Brexit, in which the mob hauled truckers out of the queues at Dover and ransacked their vans for every last bit of cheese and essential medicines.
With the Tory party now considering the prospect of deposing Theresa May just three months before the UK is supposed to leave the EU, the chances of this scenario now seem a lot higher. But when news of tonight’s vote emerged on Wednesday morning, the FTSE 100 – the index of the UK’s largest companies – rose a serene 1.09 per cent. So why aren’t the markets reacting to Brexitpocalypse?
In fact, the markets have responded. Sterling hit an 18-month low against the dollar on Monday, and the FTSE100 and FTSE 250 are at their lowest ebb all year. It is just that markets are moving in a getting-more-and-more-despondent way rather than a full-blown panic one.
The first thing to understand is that, as May herself made clear outside No. 10 this morning, it’s not over yet. The Prime Minister will face a confidence vote tonight, and if she wins it, she’ll be protected from another formal challenge for another year. If she loses it, or decides to throw in the towel anyway, there are still numerous outcomes, including one where May’s successor is humble enough to realise that their promotion hasn’t changed the position of the EU27 in the slightest and there is still only one option on the table apart from no deal.
The second is simply that, thanks to the continual bleating of Jacob Rees-Mogg and some overoptimistic addition, the prospect of Tory MPs submitting the 48 letters needed to trigger a confidence vote has been a long time coming. Plus, as recently as Monday afternoon, most pundits expected this week to be dominated by MPs voting against the Brexit withdrawal deal. In other words, this level of political incompetence is priced in. Smart investors have been hedging their bets, including the hedge fund owner Crispin Odey, who shorted sterling as early as September and told the Sunday Telegraph: “I didn’t expect negotiations with Brussels to go well and I was a Brexiteer.”
A third reason is that, in this case, politicians also factored in the market reaction. Graham Brady, the chairman of the 1922 Committee who broke the news of the 48 letters to May, explained the Prime Minister asked him to announce the contest before the money markets opened, which he duly did. The public support of numerous government ministers in the minutes after the announcement helped to give the impression May will win the vote. (The ballot, nevertheless, is secret.)
What makes the market reaction more confusing in times of political chaos is that politicians like to impose their own interpretation of it on the airwaves. After the Brexit vote, former Ukip leader Nigel Farage cited the fact that the FTSE 100 was up as a reason to stop scaremongering. But the FTSE 100 includes many multinational companies that benefit from a weaker sterling, because most of their revenue comes from abroad. The real losers in the event of a slump in sterling are British consumers who have to pay higher prices for imported basic necessities – but we won’t know the December inflation rate for months.
Investors prize economic forecasts, so the decision of the British public to ignore them and vote to leave the EU in June 2016 caught the markets by surprise. If the sanguine response to the news today suggests anything, it is that investors may be once again overestimating a group of political actors’ willingness to pay attention to economic consequences.