History sometimes hinges on the actions of one individual, and so it may prove in the case of the violent extremist who murdered British MP Jo Cox.
The Labour MP’s brutal slaying has, whatever the merits of the logic involved, tainted the ‘Leave’ campaigners in Britain’s upcoming referendum on whether to stay with in European Union.
In the space of just three days, that tragic event has been enough to reverse numerous opinion polls as well as the financial market flows that are trying to predict the outcome of this historic vote. A ‘Remain’ victory suddenly looks likely – not what the killer wanted.
Thus it was that by Monday afternoon, unexpected flows of capital into Australia shares had pushed the ASX 200 index up 1.6 per cent. It was widely expected to be headed the other way – the ‘risk-off’ scenario described in my last column.
The fallout from a ‘Leave’ victory – which, let’s remember, could still happen – would cause a flow of money out of Australia and into US-dollar-denominated assets, gold, and other ‘safe’ assets such as 10-year bunds in Germany.
Australian 10-year government bonds are now also producing some interesting price movements. From a year-low on Friday of 2.003 per cent, the yield on these bonds has moved up to 2.13 per cent (bond yields rise as demand for the bonds, and hence their purchase price, falls).
The price bonds trade at is important to the federal government, as it indicates the price it will have to accept at forthcoming bond auctions – and the Australian Office of Financial Management is auctioning off plenty of bonds right now to fund our stubbornly high budget deficits.
If the ‘Remain’ vote does triumph in Thursday’s referendum, which we’ll likely know while the ASX is still trading on Friday, one of the big questions is what will happen to Australia’s cost of borrowing.
As the chart below shows, government debt has been gobbled up by investors in the past year, sending Australian 10-year yields even lower.
But what if the yield uptick in the past few days, reinforced by the prospect of Britain staying within the EU, is the beginning of a new trend? That is, what if June 2016 is the ‘bottom’ for government borrowing costs?
‘Remain’ will still bring trouble
When the ‘Leave’ vote looked the more likely winner, a hit to commodity exporting nations such as Australia was widely discussed. Commodity prices would fall, our dollar would fall, government tax revenue would fall and so on.
But if a ‘Remain’ vote wins, it would be wrong to expect things to go back to just the way they were.
The Brexit vote has been built around a number of issues, but key among them was the alarm felt by Brits at large numbers of economic migrants, including legitimate refugees, streaming into the country.
Staying within the EU will not address the stress such migration puts on housing and other social and physical infrastructure.
Nor will staying within the EU halt the rise of far-right political groups in the UK or across other EU nations.
Nor will a ‘Remain’ result suddenly breathe confidence into EU consumers, businesses and investors, and thereby pull the continent out of its stagnant economic performance.
Even if the UK remains a part of the EU, the continent will emerge politically shaken and weakened – not good for a return to more prosperous times.
And that won’t help Australia’s lot in life.
Australia’s near future is likely to include higher government borrowing costs, higher private borrowing costs (RBA cuts notwithstanding), continuing weakness in commodity prices, and a lower dollar.
Against that backdrop, the current surge in share prices and the dollar are bad news, not good.
As covered earlier this year, what Australia really needs is a boring period of a low Aussie dollar, rising exports, decent tax revenues to balance the federal budget, and the gradual repair of a jobs market in which nearly one-in-five workers can’t get the hours they want.
After Brexit-vote volatility subsides, the best Australia can hope for is the healing of political wounds in Europe and at least some economic improvement across its troubled member states.
A ‘Leave’ victory, whatever its merits, would likely set off an extended period of similar EU-destroying votes in other member states.
The global economy is precariously weak. Central bankers around the world have tried for eight years to stimulate an economic recovery via ultra-loose monetary policy, and yet have barely made progress.
That’s why a ‘Remain’ vote that leads to at least some stability and recovery in Europe will be better for Australia, and the global economy, in the medium term.
How awful, though, that all this may have hinged on an act of unspeakable violence.