Brexit Poll Forecasts Heighten Market Anxiety: What to Watch
(Bloomberg) -- The changing contours of opinion polls on the June 23 referendum and questions about their reliability in forecasting the outcome continue to dominate sterling trading.
- Pound traded at 3-week low vs yen and Swiss franc, GBP/USD 2-wk volatility continued to climb, while European stocks trail their U.S. peers; equities, equity vols and skew, rates, credit, currencies, commodities, even coffee, are moving in sync with Brexit probability, SG says
- GBP corporate credit may continue to underperform EUR counterparts even if the U.K. votes to remain within the EU, Bloomberg strategist Simon Ballard writes
- TV debates and developments in the migrant crisis could all still impact the result while voter turnout remains a key focus for many analysts
- NOTE: Top banks’ pound forecasts for Brexit, remain scenarios
WHAT’S THE LATEST?
- The number of additional voter registrations topped 1.5 million in the seven days to midnight Thursday, after the deadline was extended due to “technical issues”; increased registrations provide a timely boost to Remain campaign, Panmure Gordon analysts say in client note
- A Times/YouGov poll shows support for remain at 43% and for leave at 42%, while online poll shows 48% leave, 43% remain and 9% undecided, according to ICM statement on website
- The What U.K. Thinks poll of poll shows remain with a 2ppt lead
- Brexit probability rises to 24.4%, according to Bloomberg Brexit Tracker, compiled by political blogger Matt Singh, while oddschecker.com shows betting odds of a leave win edges back to 29.5% vs YTD peak of 36.8%, according to oddschecker.com
- Hitachi says Brexit would force a rethink of the firm’s U.K. operations, while WPP says would have to add jobs in markets affected by Brexit such as Spain and Germany
- Norway Wealth Fund will remain a long-term investor in the U.K. regardless of the outcome of the vote, CEO Yngve Slyngstad says
WHAT’S NEXT?
- Leader of the opposition to answer questions on the referendum on June 20 on Sky News
- BBC will host TV debates June 15 and June 21
- The June 21 debate may prove to be a key market event, Credit Suisse says in a client note
- Campaigns are expected to turn their focus to encouraging the electorate to vote; turnout could play a vital role, Jamie Searle at Citigroup writes in client note; The lower the turnout, the better it is thought to be for “leave”
WHAT’S THE LIKELY REFERENDUM OUTCOME?
- Remain’s lead in Standard Chartered’s poll of polls is 7ppt, suggesting the outcome is still uncertain
- Citigroup analysts said last week they are increasingly concerned on the polls and the implication for domestic political stability after the vote due to growing rancor within the Conservative Party
- JPMorgan’s Malcolm Barr though says the supposed move toward leave looks more like noise than signal
- SEB says probably need a 10ppt lead in polls to be certain they’re predicting the outcome correctly; Standard Chartered would review downside call for the GBP, if poll of polls consistently showed more than a 13ppt lead for remain, analyst Eimear Daly writes
- Estimated odds of Brexit by UBS WM, Citigroup, IHS, SocGen and Eurasia range from ~30% to 40%; Julius Baer cut the est. probability to 30% vs 30%-40%
WHAT HAPPENS IF THE REMAIN CAMP WINS?
- Even if the U.K. votes to remain in the EU, divisions resulting from the vote could lead to early elections, according to Morgan Stanley analysts
- The bank’s economists say even if the “Remain” camp wins, slower growth and weaker inflation would push a BOE rate increase back to early 2017
- Meanwhile, ING analysts say if the U.K. votes against Brexit, the BOE could lift rates as soon as Nov.; BNY Mellon analysts note GBP strength after the Scottish referendum faded just hours after the result
- Julian Wolfson, co-head of research & political strategist at Odey Asset Management, says issues are likely to continue even if the U.K. votes to stay and Brexit risk could linger for GBP
WHAT HAPPENS ON A BREXIT?
- ECB stands ready to offer euro liquidity via swap lines, Governing Council member Ilmars Rimsevics said
- Govt paper on the process of withdrawing from the EU shows U.K. and union members will have 2 years to negotiate initially; period can be extended if all remaining 27 members agree
- Much of debate over a potential exit centers on how easy it will be for the U.K. to sign new trade deals and whether the country becomes a less attractive place to invest outside the EU
- BofAML economists say an exit would mean the U.K. would have to renegotiate deals with other regions in addition to Europe; populist backlash in the U.S. and elsewhere may make new agreements difficult
- Large current-account deficit is one of U.K.’s key economic vulnerabilities, CBA analysts write in note
- Uncertainty after a “leave” vote could increase risk premia in GBP assets; investors would want higher rate of return to compensate for perceived risks or may simply reduce exposures
- Replacing lost FDI likely to spur higher risk premia in a range of sterling assets, BOE deputy governor Ben Broadbent said last month
- MPC won’t be able to immediately offset all effects of shocks, Carney said
- Capital Economics says ECB may need to take further action; such an outcome could cause financial-market volatility, potentially adverse effects on euro-area economy and financial sector
- In event of Brexit, “referendum-itis” will be catching from Catalonia to Netherlands, in France could change the outcome of next year’s presidential election, Wolfson says
- HOW TO TRADE IT?
- CURRENCIES
- GBP/CHF and EUR/CHF downside trades expected to perform well in the event of a ’Leave’ vote, EUR/GBP seen moving sharply toward 0.70 if voters choose to remain in the EU: Goldman Sachs
- Added a short cash position in GBP/JPY Friday; also has short exposure through a long-standing cable put spread; expect renewed premium to build into vote, JPM says
- Danske Bank advises clients to hedge for a weaker pound vs euro and a weaker euro vs dollar and franc
- RATES, CREDIT
- Finance GBP 5Y tail payer spreads by selling EUR mid-curve payers, Societe Generale strategist Adam Kurpiel writes in client note
- Buy 10Y U.S. and sell 10Y Italy or Spain, UBS analysts said in May 22 note; numerous risks have potential to drive periphery spreads wider, including EU referendum, Spanish politics and possible limits on banks’ sovereign bond holdings
- Commerzbank favors cautious stance toward sovereign spreads and SSAs; Brexit tail risk unlikely to get priced out completely; pending Fed rate rise a risk for yields and spreads
- EQUITIES
- Amundi has cut exposure to European assets including equities and fixed income, CIO Pascal Blanque says
- Uncertainty before vote has spurred a rise in both equity risk premium and implied volatility on European stocks vs U.S. to near-historical highs, Barclays says
- Credit Suisse suggests Long FTSE 100 vs FTSE 250 as a Brexit hedge
- If Britain remains in the EU, Pioneer Investments sees good buying opportunities on small caps and domestic cos
- Commercial real estate and house prices are likely to fall due to deteriorating credit conditions if Brexit occurs, while a drop in GBP may boost profit at U.K. Asset managers, according to analysts
- For other views on how to trade Brexit, click here and for GBP forecasts here
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HALISTER1Source: BFW (Bloomberg First Word)
People Adam Kurpiel (Societe Generale SA)
Ben Broadbent (Bank of England/London)
Benjamin Broadbent (Bank of England)
Eimear Daly (Standard Chartered PLC)
Ilmars Rimsevics (European Central Bank)
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