In or Out, D-Day for Sterling

Thursday June 23: Five things the markets are talking about

The long wait is over. Voting stations are open and U.K citizens go to the polls to decide whether they want to be apart of the E.U or go it alone.

In the meantime, investors should expect rumors and whispers to have capital markets on the edge right up to when a clear decision is finally announced (U.K breakfast GMT Friday June 24).

If voters favor Brexit, it’s expected to fuel financial turmoil. Whatever the outcome, investors can expect all asset will be on the move, even violently, hampered by liquidity constraints, at least until cooler heads eventually prevail.

Some early U.K referendum exit data will be available by about 17:00 EDT this afternoon.

1. Sterling to a six-month high; Riskier currencies up

No matter what, volatility is front and center. Already this morning intraday sterling moves are not for the faint of heart.

Just after U.K polls opened (07:00 GMT) the pound has managed to extend its gains to hit a six-month high of £1.4921, as market optimism grows that the U.K. will vote to remain in the E.U (note thin liquidity is causing exaggerated movements).

This positive sentiment is naturally spreading to other currencies, with riskier commodity-linked currencies all sharply higher ahead of the open stateside.

The Kiwi has jumped +1% to hit a one-year high outright (NZD$0.7236); the Aussie has rallied +1.2% to a new two-month high (AUD$0.7589). The EUR, the most vulnerable of trading currency’s to the pound if Brexit occurs, has risen +0.7% to a two-week high €1.1401, while the go-to safe haven yen has comes under selling pressure, with USD/JPY up +0.4% to ¥105.00.

It’s a long day, be prepared for many unexplained price moves!

2. Stocks edge higher as U.K polls open

Global stocks trade mostly in the black in overnight trading as dealers hunker down ahead of expected volatility over the next 24-hours.

The Stoxx Europe 600 Index and the MSCI Asia Pacific Index climbed to their highest levels in a fortnight amidst a U.K vote that various opinion polls continue to indicate is too ‘close to call.’

To date, all asset classes having been moving in tandem with each poll released – sterling, government bonds, and stocks. Today’s exit releases will be no different.

Shares in Japan added +1.1% as investors prepared for the vote, while the Hang Seng rose +0.2%. Stocks in Shanghai, however, lost -0.5%. Futures pointed to a +0.6% opening gain for the S&P 500.

Indices: Stoxx50 +0.3% at 3,007, FTSE +1.0% at 6,321, DAX +1.0% at 10,174, CAC-40 +1.0% at 4,423, IBEX-35 +0.6% at 8,750, FTSE MIB +0.7% at 17,445, SMI +0.2% at 7,990, S&P 500 Futures +0.6%

3. Volatility is not cheap

Many investors have headed to the sidelines (or aggressively pared their market positions) ahead of today’s vote, preferring to look on before upping their market exposure in such a tightly contested vote – Fund managers are reporting investors’ cash levels at their highest in over a decade.

Naturally, the Brexit vote nerves continue to keep safe-haven sovereign government bonds firm with 10-year German Bunds and Japanese bonds (JGB’s) yielding +0.05% and +0.13% respectively compared to +1.70% for U.S. 10-year debt. Ten sessions ago, the market recorded record low yields across the global curve.

For commodity ‘bulls,’ gold is trading near a two-week low, having retreated -3% over the last three-days ($1,260.36) while crude prices (WTI +1.0% to $49.42, Brent +1.2% $50.51) remain firm on the back of a weaker USD and after the U.S. reported the lowest weekly output since September 2014 and a decline in its inventories.

Yesterday, Saudi Arabia’s new energy minister Al-Falih claimed that the global crude glut has now disappeared.

4. Norges leaves its deposit rates unchanged

Earlier this morning, Norway’s Central Bank (Norges) left its deposit rates unchanged at +0.50%, as expected. The central bank statement reiterated that its key rate could be cut later this year and would not exclude that it could turn negative.

Governor Olsen indicated in his post statement press conference that Norway’s rate outlook was a tad higher looking down the road and that the growth outlook is basically unchanged with global growth remaining moderate.

Not surprisingly, he mentioned that NOK (€9.3052) was stronger than prior forecast and that the labor market had developed better than policy makers expected. He again highlighted that inflation is higher than +2.5%, but low wage and stronger NOK currency would weigh it down.

The Governor expects Norway’s growth to remain weak in coming period. Norges maintained its 2016 mainland GDP growth at +0.8%, while cutting 2017 GDP growth to +1.6% from +1.8%.

5. IMF lowers forecast for U.S economy

IMF is talking a good game, but is reporting something different.

Despite “saying” the U.S economy is in good shape, their latest forecasts yesterday signals otherwise. Analysts at the fund Wednesday have cut their forecast for the year to +2.2%, down from +2.4% target just two-months ago.

The IMF cites a “maimed” energy sector, a strong dollar and turmoil overseas. Although the fund kept its forecast for a pick-up in 2017 at +2.5%, it said recent weak data means that the Fed should be standing pat on interest rates for a while – lower for longer rate policy.

Central Banks can only handle one potential event risk at a time – lets get the U.K referendum out of the way before tackling U.S rate policy.

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