HALISTER1: Brexit Risks Underestimated in Many Markets, Morgan Stanley Says

Brexit Risks Underestimated in Many Markets, Morgan Stanley Says

(Bloomberg) -- Many assets including EUR volatility reflect less risk premium than is warranted ahead of the vote on EU membership on June 23, Morgan Stanley analysts including Jacob Nell and Sheena Shah write in client note.
  • EUR, GBP the most effective and liquid hedges for referendum risk; EUR volatility hasn’t risen much for EUR, making EUR/USD volatility attractive
  • Favor U.S. stocks vs Europe; see a 10% to 20% correction on a leave vote and a mid single digit rally on a remain
  • Expect iTraxx Senior Financials and Crossover to be volatile around the vote and calculate the former could widen to around 400bps in a leave scenario, while the Senior Fins index may push through the 130bps-140bps level reached earlier in the year
  • Recommend buying 5Y UKT outright into Brexit; recommends buying Jan. 2021 gilt
    • No longer suggest owning gilts vs Treasuries
  • MS put the odds of a vote to leave at 30% while only 5% of investors at the MS equity conference last week expected such an outcome
  • NOTE: Brexit risk priced by GBP/USD vol is extreme compared to any other market, BofAML said last week
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Jacob Nell (Morgan Stanley)
Sheena Shah (Morgan Stanley)

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