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The Financial Times poll of polls has the contest finely balanced, with Leave at 46 per cent and Remain on 48 per cent. In contrast, bookmaker odds heavily favour the Remain camp prevailing.
Given a pronounced rally for riskier assets in recent days, markets are at an interesting juncture where further upside may be limited in the event the UK remains in the EU. Strategists say that markets are looking more vulnerable if voters choose to leave.
Here’s a checklist of the currencies, bonds and share markets expected to experience the sharpest shifts. An important factor for all markets is where current levels sit in relation to their trading ranges so far this year.
Amid a surge in volatility leading up to polling day, the pound will hog the spotlight. Just a week ago, the currency hit a low of $1.4013 but has since soared over $1.49 — a stunning rally in a matter of days.
With the pound setting a high for the year against the dollar, traders suspect further gains are limited if voters choose to remain in the EU. The more compelling trading opportunity may come with a decision to Leave, with the pound expected to spiral through the February low of $1.3833. Analysts at Citigroup expect the currency could drop 15 per cent on a trade-weighted basis.
Watch out for the size and speed of a decline in the event of a Leave. According to BNY Mellon, the two biggest one-day declines in sterling against the dollar came in November 1978 and September 1992 — both recording drops of 4.3 per cent.
All major currencies can expect to be affected whatever the outcome. The yen has experienced big swings in recent months, reflecting its haven status during times of investor risk aversion. Traders expect a weaker yen in the event of a Remain vote, pushing the currency back over ¥105 to the dollar. A Leave outcome could well spur an appreciation of the yen towards ¥100, testing the patience of Japanese officials and battering shares of the country’s export-oriented companies.
Euro weakness is forecast to follow in a Leave vote as investors question the viability of the single currency and the EU. The flipside, argues Citi, is that the euro “could break its $1.15 resistance level and trade towards $1.20 and maybe higher” if the UK electorate chooses to stay.
A major retreat from risk typically generates a much stronger US dollar, to the detriment of emerging market currencies and sparking contagion that also engulfs commodities. Along with the yen and Swiss franc, gold looms as a big beneficiary of any market turmoil and may eclipse this year’s peak of $1,315 an ounce in the event of a Brexit.
The other major global trend this year has been a pronounced drop in top tier sovereign bond yields on fears of weaker global growth and low inflation, fanned by the unknown consequences of a possible Brexit.
In recent days, the 10-year Gilt yield has risen near 1.40 per cent from a recent record low of 1.07 per cent. Further weakness in Gilt prices, which move inversely to yields, would likely follow with a Remain result, and could well trigger a broader and deeper global fixed income correction. Higher yields for Bunds and US Treasury cannot be ruled out.
Equities and bank stocks, in particular, have also been ensnared by Brexit jitters, with investors piling back into the market over the past week, anticipating a Remain vote. The FTSE 100 has risen beyond 6,300 and is less than 1 per cent below this year’s peak in April. The FTSE 250, whose member companies rely on the UK for more than 70 per cent of their revenues, has trimmed losses for the year to under 1 per cent.