Brexit – Assessing The Fallout

Ahead of the UK’s EU membership referendum tomorrow we bring you a full run-down of the key points considering what the latest polls are showing, what the bookmakers’ odds show, how retail traders are positioned and what the major institutions are forecasting before looking at the charts and scoping out some potential trade ideas

Key Takeaways

  • Polling results still split days ahead of the referendum.  Latest ORB poll shows Remain Campaign in the lead at 53% to 46% with 2% undecided however the Financial Times Poll tracker shows Leave campaign with a narrow lead at 45% vs 44%
  • Bookmakers show Remain is a strong favourite with Ladbrokes & Betfair both quoting a greater than 70% chance of UK remaining in the EU
  • Retail traders remain roughly 60% short GBPUSD (as of 22/06)

Key Points About The Voting

  • Voting begins tomorrow at 7am and runs throughout the day until 10pm.
  • National turnout will be released at 10 pm tomorrow evening followed by the first results at 12.30am Friday.
  • Final results will be available around 7am on Friday with the official announcement to be made around breakfast time on Friday.
  • Crucially though, 80% of the votes are expected to be counted by 4.30am on Friday so depending on what the skew is it could be that we have a good idea of the likely outcome or indeed, the actual outcome by that point

Main bank forecasts

  • Goldman Sachs: Leave to cause 1 – 2% UK GDP decline over 12 – 18mths
  • Citi: 5 – 6 % rally in GBPUSD for Remain 10 – 12% drop for Leave
  • JP Morgan: 10% drop in GBP on Leave with BoE to cut rates
  • Morgan Stanley: 10bps rate cut and 15-20% drop in UK equities on Leave
  • Barclays: 50bps rate cut on Leave
  • HSBC:  GBPUSD to 1.20 – 1.25 on Leave 1.50 on Remain

Global Implications of Brexit

  • The UK is the EU’s third largest economy and as such, leaving the union would have significant negative effects on the EuroZone economy and would also cast great uncertainty on the European Union which has been rocked in recent years by the near departure of Cyprus and Greece. We’ve heard various ECB members in recent weeks noting the willingness of the ECB to act in the event of Brexit to provide extra liquidity and indeed should the UK leave the EU, markets can certainly expect further aggressive measures from the ECB.
  • Should Brexit occur then we could also expect this to significantly impact USD via an unwinding of US rate hikes expectations. The Fed has noted recently the impact of market volatility and investor uncertainty stemming from Brexit and should Brexit occur the negative effects on the global economy and the ensuing market volatility would create a very difficult environment for the Fed in terms of raising rates and with expectations of summer rate moves already significantly weakened it is likely that expectations for a rate rise in 2016 at all would then falter.
  • The impact of investor uncertainty on risk appetite has already been starkly obvious with commodity and risk markets generally falling as GBP has weakened, generally aligned to polling results showing a majority for Leave, and rallying as GBP strengthened, aligned to polling results showing support for the Remain campaign. So again, in the event of Brexit and damage to the UK , EU and global economies, risk markets are likely to tank and this is going to put pressure on the commodity FX bloc.   Should the UK choose to remain in the EU then we can expect recent moves in risk markets to continue. This would obviously take some pressure off the Fed with focus shifting purely back to US fundamentals.

Brexit’s Impact on Other Currencies

  •  Citi are forecasting a 2 -3 % jump in EURUSD if we see the UK vote to remain in the EU and a 5 – 6% drop if the Uk votes to leave the EU.
  • Goldman Sachs see EURUSD dropping around 4% on Brexit.
  • Deutsche Bank make some interesting points however as they don’t expect EURUSD to fall if we see a Brexit due to a couple of key reasons.
  • 1 ) Brexit would likely see USD under pressure as investors dial back US rate hike expectations. Fed chair Yellen noted only yesterday the negative impact a Brexit would have on the US economic outlook
  • 2) They note the tendency of EUR to outperform with Europeans generally repatriating foreign assets during times of uncertainty.  So the moves in EUR might not be totally clear cut in the event of a Brexit but in terms of thinking about direct opportunities lets look at the Technical landscape in play  across the Sterling complex and see what opportunities there might be for positioning on the back of this event.

Base Case Scenarios

Market consensus is broadly aligned around GBP rallying higher on a vote to Remain in the EU and falling should the voting take the UK our of the EU.

Leave = GBP Down

  • Looking at that range of Bank forecasts then it’s quite clear that the consensus is for  Brexit to significantly damage the UK economy causing a drop in Sterling, and a drop in UK equities forcing the BoE to ease further with rate cuts and possibly QE expansion.

Remain = GBP Up (Short Term)

  • The market reaction in the event of a vote to remain however is a little more unclear. It’s broadly accepted that a relief rally will occur in the wake of a vote to remain with investor uncertainty sidelined and risk assets supported, though the actual moves in Sterling might be limited. We’ve already seen a huge rally in recent days with Sterling making its biggest gains against the US Dollar since 2008 so it seems that a vote to remain is priced in, in which case we might see a short continuation higher but then in the medium term that rally could fizzle out as focus once again shift back to UK fundamentals.

For trade analysis and trade ideas including  GBPJPY, GBPAUD, EURGBP & EURUSD please watch the accompanying video