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March 23, 2017

The Market Sentimentalist: Ready, Steady, Brexit

by Amareos.

On June 23 last year the British electorate (well a 52% majority) decided it wished to leave the EU. Given the cosy consensus amongst policymakers on both sides of the channel that the Brits would not back Brexit there was no Plan B. As a result, formal negotiations for leaving (the triggering of the infamous Article 50 legislation) are only now, some nine months later, about to begin[1].

The delay in starting negotiations, combined with the government’s consistent refusal to disclose what it is seeking to achieve in terms of the Brexit negotiations (the phrase playing-our-cards-close-to-our chest has been used ad nauseam), has not gone down well with the populace. Crowd anger towards the UK government is at its highest level since the referendum campaign kicked off last February; tangible proof of the British public’s “just-get-on-with-it” attitude at present (see exhibit below).

Exhibit 1: Crowd-Sourced Government Anger – UK

Amareos 1


As we noted in previous Market Insights the UK has experienced a bit of a roller coaster ride in the post-referendum period. The unexpected result generated an immediate, and strong, downdraft in crowd sentiment – indicative of extreme negativity – and the external value of GBP plummeted. However, this negativity only made it as far as the financial markets, it did not translate into a serious economic hit as many economists or policymakers, including the Bank of England, predicted. Rather, the initial economic impact was minimal and fleeting, something that prompted a radical rethink by the crowd both about the UK’s prospects but also about the usefulness of “experts”[3].

Many Remainers argue that the reason why the UK economy has fared so well is that in reality nothing much has changed. After all, the UK is still a fully paid up member of the single market and its trading arrangements remain as they were on June 22, 2016. Although perfectly true, this perspective does not reflect the whole truth.

It ignores the fact that we do know that the UK will exit the EU and, whatever the result of the negotiations, the terms of trade access will not be as favourable as a full EU member. That much is evident to anyone who appreciates that the EU has no incentive to offer the UK a deal that could, potentially, encourage other member states to leave. Such knowledge, and the uncertainty that necessarily accompanies it, should have some detrimental effect on investors’ expectations.

If we take a look at the UK crowd-sourced Fear sentiment – an indicator we used to track the effectiveness of former PM Cameron’s unsuccessful Project Fear campaign – one can discern some residual anxiety. Admittedly, fear has declined markedly relative to the record highs observed in the immediate aftermath of the vote. Nevertheless, it remains in the upper half of the range seen over the past seven years and a quick squint at the far right of the chart shows that it has ticked up slightly over recent weeks.

Exhibit 2: Crowd-Sourced Fear Sentiment – UK

amareos 2


Yet, scanning across the other UK crowd-sourced sentiment indicators it is clear that these residual fears are not directly translating into a negative crowd view towards the economy.  If anything, the collective mood is best described as sanguine, possibly bordering on complacency. This is most clearly evident in the evolution of UK crowd-sourced economic growth sentiment – see exhibit below.

Exhibit 3: Crowd-Sourced Growth & Uncertainty Sentiments – UK

amareos 3


The crowd’s view on UK economic growth is mildly positive and not much different from the levels seen in the months preceding the vote; certainly, it is much improved on the significant lows witnessed straight after the referendum. Similarly, the crowd’s perception of economic uncertainty in the UK has eased markedly since last summer. Although uncertainty remains elevated relative to the levels seen prior to the start of the EU referendum campaign it is also roughly back to where it was on the eve of the vote.

Combined these two crowd-sourced sentiment indicators strongly suggest that the surprisingly resilience of the UK economy in the months since the vote have dispelled a lot of the public’s concern as to how detrimental the growth impact of leaving the EU will be.

That being said, as Teresa May’s government endlessly points out the nature of Brexit will be a negotiated outcome with the other EU members. It may – no pun intended – be in everyone’s best interests for these negotiations to be conducted and concluded in a cordial manner. But, with so much at stake – for both sides – there are strong incentives, certainly at the beginning of the process, to play hard ball in the hope of gaining a negotiating advantage.

Imagine the following headlines:

“EU denies British hopes of XXXX”

“May says no deal on XXXX”

“Talks with EU leaders stall on XXXX”.

Over the coming months, such headlines are almost certain to appear on internet pages, TV sets or newspapers and it is just as easy to image the public’s current sanguine views about the UK’s economic prospects being negatively impacted upon reading them.

Such headlines would have increased potency because of the limited time scale for completing Brexit negotiations as specified in the Lisbon Treaty. The two-year time window is an absurdly short period for the complex task of unpicking of all the legislative overlap created during forty years of British participation in the project (albeit restricted) implying the risk of a “cliff-edge” scenario materializing in March 2019 remains very real[5].

Given the considerable uncertainty surrounding the eventual outcome of the negotiations a slew of British politicians, who as a group are heavily biased in favour of Remain[6], have argued that because the electorate didn’t[7] know what type of Brexit they were voting for they should be given the opportunity to vote again in a second referendum once the final terms of the deal for exiting have been agreed[8].

This seems a legitimate, plausible, dare we even say fair, viewpoint; voters might change their minds about leaving the EU once they know the terms of the divorce. Nevertheless, we consider it unlikely.

Breaking down crowd-sourced UK economic growth sentiment data by media type, we  find that in terms of trends the two media types (mainstream and social) are quite closely correlated[9] – see exhibit below. But, in level terms, the mood of social media – the orange line – is more constructive. This suggests that the British public are more confident about the UK economy than the mainstream media would have us believe. Hence, we judge that, presently, there is little appetite for a second referendum.

Exhibit 4:  Crowd-Sourced Economic Growth Sentiment By Media Type – UK

amareos 4


The good news for referendum junkies is that even if a second British EU referendum is unlikely the odds of another referendum in Scotland are rising significantly. Just this week SNP leader Nicola Sturgeon announced she was starting the legal process in preparation for a second independence referendum on the basis that Brexit constitutes “a significant and material change” from the circumstances of the 2014 vote.

Bearing in mind that the Scottish people voted overwhelming to stay within the EU (62% versus 48% in the UK as a whole), one would expect that if the Scottish electorate agreed with the SNP’s view that the change was “significant and material” that it would have translated into a surge of support for independence.

As the exhibit below confirms, and no doubt much to Sturgeon’s consternation, opinion polls examining voters’ intentions in a second independence referendum show no such surge in support for leaving the UK in order to remain within the EU[10]. Despite the polls not supporting Sturgeon’s logic, with the Yes and No camps so close (implying the result is very much up for grabs) it is simply too attractive for the opportunistic SNP not to attempt another go at securing their longstanding political objective[11].

Exhibit 5: Scottish voter intentions in Second Independence Referendum

amareos 5


What makes the second Scottish referendum particularly problematic in terms of Brexit is that the SNP are aiming to hold it in late 2018/early 2019 when the two-year window for negotiations is almost over. Politically this is a savvy move[12] from the SNP, but for the UK as a whole it represents a very serious distraction; one that will make the already challenging Brexit negotiations even more difficult and uncertain. This is something that is unlikely to sit well with investors.

Pulling this altogether, the implications for UK financial assets and the currency appear to be skewed to the downside. The moderately optimistic view of UK economic growth presently held by the crowd stands at odds with the likely torturous nature of the negotiation process just about to kick off. That said, as shown in the final exhibit, between the equity market and the currency, it is the former (where crowd sentiment is significantly higher) that appears to be the more vulnerable because at least in terms of the currency some crowd negativity already appears to be in the price[13].

Exhibit 6: Crowd-Sourced Sentiment – UK Financial Assets

amareos 6


Sentiment Analytics are based on MarketPsych indices



[1] From a risk management perspective, the handling of the entire EU referendum process was deeply flawed. A Plan B should have been drawn up between the British government and the rest of the EU – at least in terms of broad policy outlines – prior to the vote having taken place. This would not only have helped the debate, by providing voters with a clearer picture of what Brexit actually would entail, but it would have created a solid foundation for the negotiation process that is about to begin. That this did not occur is the height of policymaking hubris of both sides.

[2] See:, and

[3] A feeling that further contributed to the growing sense that we inhabit a post-truth world where facts are no longer valued; a topic we discussed in a previous Market Insight –

[4] See the cards comment above.

[5] A few quick wins, such as guaranteeing the reciprocal rights of existing EU residents to stay in the UK, could help appease such concerns.

[6] But they respect the will of the British voters (yawn!)

[7] In fact, couldn’t given the absence of a Plan B.

[8] Former British PM Blair has been one of the most vocal advocates of a second referendum.

[9] This is unlike the situation in the US post-Trump (the other major political shock of 2016) as we noted in a previous Market Insight – see: 

[10] Seeking independence from a smaller, more historically-connected, union to stay within a larger, less historically-connected, union requires mental elasticity that we do not possess.

[11] Pushing the electorate into a second referendum when the first didn’t go the way it was supposed to is very much in keeping with EU tradition. This tactic was used in Ireland after they initially rejected the Lisbon treaty in the 2008 referendum and the fear of British Leave campaigners is that Blair and the other Remainers are seeking to do the same by calling for a second Brexit referendum.

[12] They will either get increased concessions for Scotland. Alternatively, if these are not forthcoming there will be an increased probability of winning the second independence referendum; an outcome the SNP really desires.

[13] Since the referendum there has been a negative correlation between the currency performance and the equity market performance due to the improvement in the UK’s terms-of-trade generated by GBP weakness. However, if the Brexit negotiations are very difficult the associated uncertainty will likely prove the dominant effect for both asset prices ie. the negative correlation will weaken.

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