Forget about event risk – this is the new normal

Forget about event risk – this is the new normal

Joshua Roberts Weekly bulletin August 2018
As market participants and politicians return from their summer breaks, it would seem that the reverberations resulting from three recent geopolitical shocks are approaching their respective climaxes.

In the US, with November’s mid-term elections around the corner, the president’s former attorney has apparently implicated him as a co-conspirator in the breaking of federal campaign finance law. In the UK, party conference season and the legislation demanded by the ever-ticking clock of Article 50 will determine the survival of the most unpopular and divided government since Callaghan’s. More broadly, the final months of negotiations before the country leaves the EU will shape not just the UK’s future but that of the continent as a whole.

Nevertheless, it would be a mistake to treat any one as a single ‘event risk’ that will shortly be resolved. In the following, we look at why the risks – and hence the market volatility – associated with each event will persist far beyond the coming months.

President Trump

The sad truth is that the allegations that Mr Trump was a co-conspirator to a federal crime, made by his former attorney, have done little to harm the president’s position. Even if true, it is far from clear whether it is constitutionally possible to indict a sitting president.

That leaves removal by impeachment, which requires the approval of two-thirds of the Senate. The anti-Trump lobby does not currently have the necessary votes, and is unlikely to have them after the mid-term elections either. Whatever his opponents think of him, Mr Trump’s actions simply haven’t harmed the support from his core voter base.

Expect his errant tweets to continue to move markets for at least another two years – and more likely for another six.

UK politics

As in the 1970s, the UK’s two main political parties have spent much of the last few years talking themselves into nervous breakdowns. The traditional way for the Conservative Party to resolve this is to depose its leader over the summer recess and elect a new one ahead of conference season. Clearly, this hasn’t happened. In any case, both parties have spent the summer side-lining domestic issues in order to debate quite how much racial or religious prejudice is acceptable for their leaders (or potential leaders) to be associated with. This approach is unlikely to endear the majority of voters to either side.

In 1979, the impasse was broken by a charismatic opposition leader with a manifesto that appealed to a huge cross section of society and the obvious ability to control her party. The reader is left to form their own conclusions about whether the current opposition is capable of a similar feat.

Brexit negotiations

With the Article 50 deadline just seven months away, commentators have been referring to the European Council summit in October as the date by which any Brexit deal must be agreed in order to be ratified by March 2019. Nevertheless, those familiar with EU negotiations point out that virtually every agreement with the bloc is finalised at the eleventh hour, and that the EC could extend this deadline well into next year if it chose to.

This is no doubt true, but it also mischaracterises what we mean when we talk about Brexit risk. When we now say ‘Brexit’, we are no longer just referring to the UK’s withdrawal from the EU, but to what the country’s relationship with Europe should be. Whatever deal is agreed in Brussels by 29 March 2019, this is not a negotiation that will remain closed the following day. Britain’s relationship with the rest of the continent has been under debate for at least the last two millennia. Neither it, nor the associated economic uncertainty, will be resolved in the next seven months.

Despite the current challenging climate, it is possible for businesses to protect themselves from politically inspired market volatility. Indeed, it may prove vital to do so. To be truly robust, any risk management strategy needs to look well beyond the coming months.

The way markets are currently responding to events may be as unusual as the events themselves – but it is likely to persist for the foreseeable future.

To discuss any of the issues raised in this week’s bulletin, please contact Joshua Roberts or call on +44 (0)207 493 3310.


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