Halister News

(Bloomberg) -- While the consensus view is that remain will win the June 23 vote on EU membership, opinion polls are still too close to be confident this will be the case and investors may want to consider hedges, BofAML analysts led by James Barty write in client note.

• Brexit risk priced by GBP/USD vol is extreme compared to any other market; investors looking to harvest the FX/equity vol dislocation may consider selling July 16 GBP/USD call spreads to help fund July 16 SX5E calls
• EUR/USD 1-mo. 25d puts offer over 2 times greater hedge benefit than GBP/USD puts at current pricing
• In stocks, favor hedging via long VSTOXX July call spreads against a vote to leave and SX5E vs SPX Dec 16 outperformance calls, contingent on SPX being higher at expiry as a hedge for a vote to stay
  • Any Brexit would trigger a general risk-off event in global markets, with a spillover into global stock markets and currency markets more generally; given the uncertainty about what would happen next, unlikely there would be a swift recovery in markets
• Still see attractive options in short sterling; buying an L U6 call option, financed by selling an L U6 put remains a cheap, efficient Brexit hedge
• A 5s20s flattener in gilts will work well in BofAML’s base case of a remain as expect a steepening of 2s5s, with a gradual path of rate hikes getting priced back into the curve if the country votes to leave
• Favor being short gilts vs bunds in both referendum outcomes
• Cash credit investors don’t appear to be pricing in political risk and are more focused on the positive technicals so, should spreads continue on the current trend, the rally on a remain may be limited, while an exit would have an exaggerated impact
  • Says GBP bonds that have tightened most since announcement of CSPP would be most prone to widening if the U.K. votes to leave
  • These include BP 4.325% 2018, Standard Chartered 7.75% 2018, Unilever 2% 2018 and General Electric 5.625% 2019; same applies for euro bonds issued by U.K. names