London Mayor Boris Johnson joined the anti-EU camp over the weekend and signaled he would campaign for the U.K. to exit the EU ahead of the June 23 vote. Financial markets were spooked by Johnson's comments, and member states of the EU were taken by surprise by this important endorsement by the capital's mayor. Across the pond, United States Republican presidential candidate Donald Trump continued to dominate the Republican primaries, winning the South Carolina primary and signaling strength ahead of "Super Tuesday," to be held next Tuesday.
Mayor Johnson's words sparked a selloff in the pound sterling, which retreated nearly 2 percent against the dollar Monday and more than 1 percent against the common European currency, the euro. Polls show Britons divided over the question of the "Brexit," referring to the exit of the U.K. from the EU. Membership in the EU has only enhanced London's role as the global financial center, and a move away from the EU would hurt British banks doing business in the union.
While EU membership means the U.K. must allow migrants from member states to freely flow into the country, Prime Minister David Cameron has signaled potential amendments to such rules. Cameron claimed to have received concessions from Brussels on Friday that would give it "special status" in the union; however, the monetary gains from this "renegotiation" were less than 1 percent of the total outflow from the U.K. to stay in the union. Johnson's announcement that he would oppose his fellow Conservative minister of parliament, Cameron, while surprising to some, put him in good company on the Conservative side. Many ministers in the British government, including Justice Minister Michael Gove, have been outspoken supporters of Brexit.
The "Brexit" camp is, however, hardly a monolith. While Johnson supports voting for a "Brexit," he may not oppose Brexit itself. In an editorial in The Telegraph on Sunday, Johnson said that a reading of EU history indicates that "they only really listen to a population when it says No," referring to the EU. Johnson's comments have widely been interpreted not as an endorsement of leaving the EU but strengthening the hand of the U.K. in negotiating a better deal. Johnson goes on to say he wants to see the EU-U.K. marriage not as a marriage at all but as one based "on the lines originally proposed by Winston Churchill: Interest, associated, but not absorbed; with Europe, but not compromised."
The prime minister's office was quick to respond to shooting down of any hope of renegotiating with the EU should Britons vote for the "Brexit," saying: "There are only two choices for the British people, that's remain or leave." This last statement begs the question, does the prime minister really want to stay in the EU or merely appear to? Ultimately, Johnson appears more inclined to benefit from a vote for Brexit while still remaining in the U.K., while Cameron appears to appease his EU counterparts while signaling any vote would be final.
Should the U.K. vote on June 23 to leave the EU, the government would use "article 50" and begin a two-year-long divorce in which the two entities would be untangled from each other. Johnson may be setting himself up for a future run at 10 Downing Street straddling an issue that has divided the electorate. Major banks have put Brexit at nearly 50 percent, meaning it is anyone's guess how the people will vote.
The major news out of the U.S. Republican Primary in South Carolina was not that Donald Trump won, but that Jeb Bush dropped out altogether. Marco Rubio has the most to gain from Bush's departure, picking up nearly one-third of his votes nationally and over half of his votes in Florida, a delegate treasure-trove. Rubio not only tightened the gap between Trump and himself to 10 percentage points, but he also narrowly defeated Ted Cruz, the winner of the Iowa caucus. The Republican establishment continues to fear a Trump win of the nomination, which may spell disaster for the party in the general election, but there's a worse outcome: That Trump wins the election.
With constant trips to the populist well, Trump continues to win primaries albeit with tightening margins. A landslide win for Trump on Super Tuesday would almost certainly hurt U.S. financial markets in the short-term as well as the dollar while a narrow win or a defeat would move markets higher. Look for Rubio to take advantage of this momentum, pick up Bush votes and take several key states next Tuesday.