Halister News

(Bloomberg) -- If the U.K. votes to leave the EU, heightened risk-aversion is likely to result in wider peripheral spreads, UBS analysts including Nishay Patel write in client note.

• Largest impact on spreads is likely to be on Ireland and Spain, the countries with the largest fundamental exposure to the U.K., while within the core markets, the Netherlands is the most exposed
• Expect 10Y Italy-Germany yield spread to widen above 175bps, Spain to underperform Italy, 10Y Ireland-Germany spreads to widen above 90bps, and Netherlands to underperform Germany
• Market concerns may dissipate relatively quickly were the European Council to indicate goodwill and determination to finish negotiations quickly and in a cooperative fashion, with a view to maintaining a high degree of integration with the U.K.
• Brexit may trigger a knee-jerk drop in EUR/USD, but don’t expect material euro weakness as episodes of rising eurozone political risks have continually failed to weaken the single currency
  • While risk-aversion may pressure the CHF, would expect the SNB to move against currency strength
• The longer-term impact would depend on whether a U.K. vote to leave leads to further EU integration or disintegration
  • The latter could trigger a substantial widening in spreads and the former would be supportive of higher bund yields and tighter spread
• NOTE: Brexit would send pound down another 25%, favor U.K. large cap internationals, UBS said yesterday