HALISTER1: WHAT TO WATCH: Undecided U.K. Voters Hold Key to ‘Brexit’ Fate

WHAT TO WATCH: Undecided U.K. Voters Hold Key to ‘Brexit’ Fate

(Bloomberg) -- Opinion polls in coming weeks will be scrutinized for any signs undecided U.K. voters have made their minds up in favor of staying or leaving the EU.
  • Recent resignation of a pro-“leave” govt minister and recent bomb attacks in Brussels may weigh
  • WHAT’S THE LATEST?
  • ICM survey conducted between March 18 and 20 showed a reversal of the prior week’s two-point lead for remain
    • 43% say they would vote for leave, 16% remain undecided
  • Before that poll, PM David Cameron said the result is on a knife edge
  • Iain Duncan Smith’s resignation plunged Conservative Party into one of its biggest crises since 2010, possibly increasing “Brexit” risks according to Morgan Stanley analyst Hans Redeker
  • While polls didn’t shift significantly after Boris Johnson said he will campaign to leave, analysts say he can sway voters if he starts to campaign more actively
    • Last week, he told MPs that the risks related to “Brexit” have been overplayed and the City would ‘‘flourish mightily’’
  • The BOE joined the debate this month, saying uncertainty ahead of the vote may delay investment decisions and curb growth
    • Kristin Forbes said there isn’t enough data yet to estimate the effects
  • Global investors have cut their allocation to U.K. equities this month to net 20% underweight from net 17% underweight
  • WHAT’S NEXT?
  • The Electoral Commission’s deadline to determine the official “leave” and “remain” campaigns is April 14
    • The decision gives the lead campaign groups higher spending limits and marks the start of the referendum campaign the day after
  • Successful implementation of EU deal with Turkey to stem the flow of migration during this period is important factor in reducing chances of “Brexit, ” JPMorgan says
    • UBS Wealth Management analyst Ricardo Garcia says if deal leads to lower inflows of migrants that will be more important in voter’s minds than events in Brussels
    • Once PM Cameron starts actively campaigning after April 14, response of undecided voters will be key; expects most to favor staying in the EU
  • Rabobank analysts say implications of the blasts aren’t entirely clear as posturing by anti-Europe UKIP could tarnish the party and it’s possible the attacks elicit both sympathy and solidarity from U.K. population
  • WHAT’S THE LIKELY OUTCOME?
  • Polls show the remain and leave campaigns fairly balanced, but don’t knows range between 16% and 28% since end of Feb
    • There have been no phone polls, which have tended to show greater support for staying in the EU, in the past month
  • Citigroup says 38% of polls YTD show a majority voting for an EU exit vs 16% in 2H 2015
  • RBC says betting markets are a better gauge of implied probabilities and these show a jump in likelihood of a leave vote in recent days to near a peak of ~40%
  • UBS WM sees around 30% chance of “Brexit” while Citigroup puts the likelihood at 30% to 40%
  • WHAT HAPPENS IF U.K. VOTES TO STAY?
  • BOE could lift rates as soon as November, ING analysts say
  • Goldman expects pound to gain about 15% vs euro and about 4% vs dollar as BOE may tighten faster than market currently expects
  • Morgan Stanley economists argue that slower growth and weaker inflation would still delay first rate increase till early 2017; say GBP could recover slightly but won’t retrace all of its fall since mid-2015
  • BNY Mellon analysts say GBP strength after the Scottish referendum faded just hours after the result
  • Julius Baer analysts don’t expect a long-lasting relief rally and see a slightly weaker EUR/GBP at 0.84 on a 12-mo. horizon
  • The vote may spur persistent political and economic uncertainties that may not end even if the country votes to stay, Citigroup says
  • If divisions remain, they could lead to an early election, Morgan Stanley analysts say
  • WHAT HAPPENS ON A BREXIT?
  • EU provisions suggest negotiations for exit can take up to two years; some commentators say, if needed, that period could be extended
  • In the worst case, the economy would be 3.9% smaller by 2030 compared with staying in the bloc and GBP21.1b of business investment would be lost, Oxford Economics says
    • The best case sees a loss of 0.1% in GDP
  • GBP may fall 10% to 20%: analysts from Barclays to HSBC
  • British manufacturers, retailers and universities may see their credit ratings slide and economic growth may slow if the U.K. votes to leave: Moody’s Investors Service
  • Fund managers Aberdeen, Henderson face the largest operational risks in a ‘Brexit,’ scenario, UBS equity analysts say and the U.K. retail sector may de-rate, the bank says
  • Credit Suisse economists say a Brexit event would have wide- ranging negative economic consequences beyond the U.K. most likely including a recession in the euro area, something that doesn’t yet appear priced in the G-10 FX vol curves
  • A vote in favor of exiting will spawn the deepest market slump since the Greek debt crisis and the region’s HY bonds will be among the biggest losers, analysts and investors say
  • HOW TO TRADE IT?
  • Longer-term investors don’t appear to be adequately hedged against Brexit risk, JPMorgan strategists write
  • Nomura recommends a tactical GBP/USD short exposure expiring
  • HSBC says long CHF is the best hedge against the risk of Brexit
  • ING analysts recommend sterling strip steepeners, buying Dec-16 and selling Dec-17 contract, given the rate-rise cycle may begin soon after a remain vote and any easing on a leave vote may be reversed in 2017
  • Brexit risks and increased ECB purchases also present bullish case for long-end EUR rates so recommend buying EUR 10s30s conditional bull-flatteners with 1-month expiry, SocGen says
  • In stocks, Barclays recommends U.K. stocks with dollar exposure, FTSE 100 companies and consumer staples
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
David Cameron (United Kingdom of Great Britain and Northern Ireland)
Hans-Guenter Redeker (Morgan Stanley)
Iain Duncan Smith (United Kingdom of Great Britain and Northern Ireland)
Kristin Forbes (Bank of England)
Ricardo Garcia (UBS AG)

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