'Brump' or 'Trexit'? Markets may conflate year's biggest risks

Wed Jun 8, 2016 5:18am EDT
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By Mike Dolan

LONDON (Reuters) - Even though market myopia is often used to explain why investors appear to be ignoring November's U.S. presidential election while trading furiously around this month's vote on Britain leaving the EU, the two events may end up being conflated.

Fund managers and economists, including Harvard professor and Democrat grandee Lawrence Summers, puzzle endlessly as to why UK and European markets are gyrating ahead of the "Brexit" vote but U.S. assets have barely blinked at the success of celebrity businessman Donald Trump's bid for the White House.

Volatility surrounding a possible redefinition of Britain's dominant trade and political relationship is relatively easy to understand. It's not only about how the potential hiatus affects the UK economy but also how wider European and euro zone markets are likely to suffer from uncertainty over the future of the EU integration itself.

Britain may be the world's fifth largest economy but the combined economic output of the EU is 22 percent of global gross domestic product, according to International Monetary Fund data.

Many argue Republican Trump's proposals for reshaping the trade and diplomatic relations of the world's largest economy, his anti-immigration policies and his questions about U.S. Treasury obligations create at least as much market uncertainty as the Brexit referendum.

Bookmakers and prediction markets see neither a vote for Brexit nor a Trump win as the most likely outcome. But they do ascribe a similar probability to both results: roughly a one-in-three chance that markets would typically take seriously but have done so only in one of the instances this time around.

While sterling, sterling options, UK housebuilding stocks and even government bonds from countries on the euro zone periphery have juddered back and forth for months, there has been no perceptible jolt to date for the U.S. dollar or its derivatives, Treasury bond prices or Wall Street stocks from the White House election race.

Quite the contrary. The S&P500 index of top U.S. companies hit its highest levels for almost a year this week and the VIX index, or "fear gauge", of implied volatility on the benchmark S&P remains sedate near its lowest levels of 2016.   Continued...

A British Union flag flutters in front of one of the clock faces of the 'Big Ben' clocktower of The Houses of Parliament in central London, Britain, February 22, 2016. REUTERS/Toby Melville/File Photo