WHAT TO WATCH: Pound Pricing Out Brexit Risks May Be Premature
(Bloomberg) -- Sterling trades at its highest level versus the dollar since February, having reversed losses seen after U.K. PM David Cameron confirmed the EU membership referendum date for June 23.
- Some analysts say the pound’s gain reflects greater certainty the electorate will back the “Remain” camp, but others warn this may reflect a misreading of recent opinion polls
- GBP corporate credit has performed strongly in last couple of months and is showing no signs it is moving to price in any of the potential risks associated with the vote, Bloomberg strategist Simon Ballard writes
- The “Leave” campaign’s strategy, the U.K.’s economic performance and next stages of the migrant crisis could all still impact the result as well as voter turnout, analysts say
- WHAT’S THE LATEST?
- The Bloomberg Brexit Tracker puts the probability of the U.K. leaving the EU at about 21%; an ORB/Telegraph poll published Tuesday indicated 51% of Britons would vote to stay
- Betting firm William Hill said Tuesday the odds of the U.K. staying had shifted to 1/4 from 2/7, before shifting to 3/10 on Wednesday
- Online polls by ICM and YouGov showed support for “Leave” ahead of “Remain” at 46% to 44% and 42% to 41% respectively; online polls are said to be less reliable than phone surveys
- Outgoing London mayor Boris Johnson says the vote will be a “moment of destiny” to decide “who runs the country”
- Former Scottish First Minister Alex Salmond says Scotland will push for another independence vote within two years if U.K. votes to leave
- “Vote Leave” campaign chief Matthew Elliott says an exit will allow the U.K. to negotiate a better deal than Switzerland
- The group issued a pro-Brexit letter signed by 100 City leaders on Friday
- WHAT’S NEXT?
- Treasury analysis of short-term Brexit impact will be published in May, Chancellor of the Exchequer George Osborne says
- This could prove even more politically contentious than the earlier report as it requires a greater degree of judgment to discern the short-term effect, leaving the analysis open to the accusation of political bias, AXA IM’s David Page says
- PM Cameron is due to give MPs evidence on EU membership on May 4
- May 5 mayoral and local elections likely to be parsed for any signs of support for the “Leave” campaign
- Given migration is one of the electorate’s main concerns into the referendum, migrant flows may also influence the outcome, HSBC economists say
- JPMorgan says successful implementation of an EU-Turkey deal to stem migration flow would lower the likelihood of Brexit
- Jefferies analyst Marchel Alexandrovich writes in client note the decision for many is likely to come down to economics, thus the “Leave” campaign’s ability, or inability, to make a convincing argument for how the U.K. could be better-off outside the EU is crucial
- WHAT’S THE LIKELY REFERENDUM OUTCOME?
- TD Secs analysts say the apparent shift in polls toward greater support for the “Remain” camp may reflect a shift in polling methods rather than any change in views
- Voter turnout will be key, with a low-to-average turnout favoring a “Leave” win, they add
- SEB says polls ahead of last year’s general election and the 2014 Scottish referendum suggested results very different from the actual outcome; to be certain calculates they are predicting the right outcome, a 10pp lead is probably needed
- Estimated odds of Brexit by UBS WM, Citigroup, IHS and Eurasia range from ~30% to 40%
- WHAT HAPPENS IF THE REMAIN CAMP WINS?
- The vote may spur persistent political and economic uncertainties that may not end even if U.K. votes to stay, Citigroup says
- Even if the U.K. votes to remain in the EU, divisions resulting from the referendum 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 November
- BNY Mellon analysts note GBP strength after the Scottish referendum faded just hours after the result; Morgan Stanley says sterling could recover slightly but won’t retrace all of its losses since mid-2015
- WHAT HAPPENS ON A BREXIT?
- EU provisions suggest negotiations could take up to two years but some commentators say that period could be extended, if needed
- 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 less attractive place to invest outside the EU
- Britain risks losing its influence on the global stage if it votes to leave the EU, business leaders warned in a Bloomberg panel discussion on Friday
- That echoes comments by U.S. President Obama saying if U.K. leaves the EU, a trade agreement with U.S. is “not going to happen anytime soon”
- The Treasury, the IMF and the OECD have all issued stark warnings
- Think tank Open Europe says growth could be 2.2% lower by 2030 if there’s no deal with the EU or the country reverts to protectionism
- GDP could be 1.6% better off in a best-case scenario if U.K. strikes a free-trade agreement with EU following an exit, pursues ambitious deregulation and opens up almost fully to trade in the rest of the world
- Berenberg’s Kallum Pickering says one of the more serious potential risks, albeit a low-probability one, is that Brexit triggers a balance-of-payments crisis that may force BOE to raise rates, further worsening domestic conditions
- Meanwhile, eight high-profile economists declared Britain would do better outside the Union
- MUFG economist Brendan Brown says a vote to leave could be good news and any change in trade tariffs could be dwarfed by exchange-rate moves
- Inward investment will depend several factors including economic dynamism, Brown said at a press conference in London on Thursday; Brexit could see the U.K. break from the global policy hegemony, which has been accompanied by low growth, he adds
- ECB’s Draghi says Brexit uncertainty has already affected markets though risk that an exit would endanger the euro- area recovery is “limited”
- A poll shows Swedish support for the EU would drop if U.K. leaves
- Any market turmoil after a vote to leave could stop Fed rate increases, UBS WM global CIO Mark Haefele says in an interview
- Fed’s Lockhart has said Brexit poses a risk that could spill into the US economy
- HOW TO TRADE IT?
- Investors should brace for a more than 4% drop in sterling in the referendum run-up, says Validus, the most accurate GBP forecaster in 1Q
- HSBC says long CHF is the best hedge against Brexit risk
- MUFG analyst Derek Halpenny says there’s a good chance GBP/USD will perform a lot better than markets anticipate if “remain” maintains its lead in the polls; may not turn lower
- If a vote to leave coincides with unfavorable global market conditions, pair could fall to mid-1.2000’s in the initial aftermath; GBP/JPY may also be volatile
- SG analysts says risk premia have been priced out of the front end of the curve; favors receiving 1Y1Y GBP/USD XCCY basis, which saw big moves in the run up to the Scottish referendum
- SEB says a GBP option strategy it recommended at the start of April is in profit and has further to go
- TD Secs took profit this week on its short-sterling steepener trade and a short 2Y gilt trade, saying support for the “Remain” camp is unlikely to extend much further
- DZ Bank analysts see potential for an increase in fears over Brexit and the Greece situation in coming weeks
- They trim their 10Y bund yield forecast to 0.25% on a 3- mo. view, although expects markets to move largely sideways near term
- If the U.K. votes to leave the EU, heightened risk aversion may result in wider peripheral spreads, UBS analysts say
- An escalation of the Greece situation, alongside the U.K. referendum, could drive peripheral spreads wider, weigh on EUR and increase the currency’s volatility, Barclays analysts write
- If the U.K. were to vote to leave, gilts wouldn’t be on the top of investors’ list of British assets to sell, Newton’s Howard Cunningham says in interview; he favors linkers, which could find support whatever the outcome
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People David Cameron (United Kingdom of Great Britain and Northern Ireland)
Alex Salmond (United Kingdom of Great Britain and Northern Ireland)
Barack Obama (United States of America)
Boris Johnson (Greater London Authority)
Brendan Brown (Mitsubishi UFJ Securities International PLC)
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