HALISTER1: WHAT TO WATCH: Brexit Uncertainty Weighing on Data and the Pound

WHAT TO WATCH: Brexit Uncertainty Weighing on Data and the Pound

(Bloomberg) -- Sterling pared recent gains amid evidence the June 23 referendum is weighing on growth, and as investors and analysts say too little risk was priced in the currency.
  • Investors continue to express interest to hedge against risk from vote via options, Bloomberg strategist Vassilis Karamanis writes
  • “Leave” campaign’s strategy, U.K.’s economic performance and next stages of migrant crisis could all still impact the result as well as voter turnout, analysts say
  • WHAT’S THE LATEST?
  • U.K. April PMIs came in much weaker than expected; sharp declines suggest 2Q growth could be zero, Markit chief economist Chris Williamson writes in a note
  • Brexit uncertainty among reasons for the worst like-for-like retail sales since 2008, according to BDO High Street Sales Tracker
  • Medical device maker Smith & Nephew doesn’t expect significant from Brexit, while banking group RBS and property group Derwent London already affected
  • Pro-exit party UKIP gains in local, regional elections, but little evidence that Brexit support is on the rise
  • Scottish First Minister Nicola Sturgeon said she could see a fresh independence vote during her premiership
  • Bloomberg Brexit Tracker puts the odds of an exit at ~22%
  • Those in favor of an exit in PM David Cameron’s Conservative Party threatened to sue him if he doesn’t take down govt websites supporting “Remain” vote
  • Trade deal negotiations post-Brexit would be “long-drawn process” as all EU members would have to sign up to it while their interests differ, says Ulrich Hoppe, director general of German-British Chamber of Industry & Commerce
  • Turkish PM Davutoglu, who negotiated a deal with the EU to stem migrant flow, stepped down on Thursday, triggering doubts over agreement
    • JPMorgan has said successful implementation of deal would lower Brexit likelihood
  • 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
  • BOE’s quarterly Inflation Report due on May 12; would be very dovish if the bank endorses the current rate path, but it will also want to avoid inadvertently sending a hawkish signal, Nomura’s Philip Rush writes in research note
  • BBC will host debates on May 19, June 15 and June 21
  • 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?
  • JPMorgan says analysis of opinion polls shows the lead for the “Remain” camp has halved to 4ppts since February
  • SEB says polls ahead of last year’s general election and the 2014 Scottish referendum suggested results very different from the actual outcome; probably need a 10pp lead to be certain surveys are predicting the right outcome
  • 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 losses since mid-2015, while Standard Bank sees 5% to 10% upside
  • 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
  • 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
  • Large current-account deficit is one of U.K.’s key economic vulnerabilities, CBA analysts write in note
    • Uncertainty from a “Leave” vote could increase risk premia in GBP assets; investors would want higher rate of return to compensate perceived risks or may simply reduce exposures
  • 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
  • If U.K. portfolio balance reverts back to mid-2012 levels on any Brexit, GBP would fall another 7% from current levels, UniCredit says
  • Eight high-profile economists declared Britain would do better outside EU
  • 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 and Kaplan say U.S. central bank must take Brexit into account
  • HOW TO TRADE IT?
  • Investec AM re-entered sterling shorts this week; Baring AM re-opened a short cable position, targeting 1.40
  • GBP may react to trend in opinion polls rather than each result; GBP/USD likely to undercut 1.40 in days prior to the vote, Nomura strategists write in note
  • Standard Bank’s Steve Barrow favors near-term caution via hedging sterling receivables or buying sterling puts; pound is a buy before referendum, would be extremely surprised if U.K. voted to leave
  • Schroders considering GBP longs; sees GBP/USD in ~1.55-1.60 range if Brexit avoided
  • U.K., European stocks could fall 15%-20% in the event of Brexit, albeit not necessarily in one immediate hit, Morgan Stanley strategists write
  • 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
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Chris Williamson (Markit Group Ltd)
David Cameron (United Kingdom of Great Britain and Northern Ireland)
David Page (AXA Investment Managers UK Ltd)
George Osborne (United Kingdom of Great Britain and Northern Ireland)
Kallum Pickering (Joh Berenberg Gossler & Co KG)

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