Risk aversion continues to drive markets ahead of the U.S. open on Monday, as investors seek safety ahead of a number of key risks events over the next couple of weeks.
The U.K. referendum next week is right at the top of this list given the destabilisation effects that a vote to leave the E.U. could have on global markets. For a long time, markets have appeared very susceptible to a shock and we’ve seen a couple of examples of this fragility over the last 12 months. Should the U.K. vote to leave the E.U. next week, it would be a massive test of the markets ability to deal with a significant blow.
As we approach the final sprint in the referendum campaign, the leave camp is gaining some serious momentum and even the betting odds are starting to suggest it may be a close vote. The remain side came out all guns blazing early in the campaign and you have to wonder whether they have anything left in the tank. Their message doesn’t appear to be resonating as much with voters and there doesn’t appear to be a plan B. If this continues, the uncertainty will only grow into the vote and risk aversion could persist. The pound is coming under considerable pressure again today on the back of the gap in the betting odds being closed. The way things are going, we could see the pound trading a new lows for the year before we even reach the vote. Key support still remains around 1.40 for now though.
The Federal Reserve will meet this week and while the jobs report may have given them a reason to put off raising interest rates again, the closing of the gap ahead of the U.K. referendum is likely the real reason behind the delay. Had the polls been wider and the threat of a “Brexit” small, I believe the Fed would have looked beyond one weak jobs report and pushed ahead with a hike this week but under the circumstances, it’s now very difficult to justify such a move. Investors will now be focused on Fed Chair Janet Yellen’s communication on Wednesday, the new economic projections and of course, the dot plot. Should they still signal two hikes this year and one soon, July will be very much on the table, assuming of course the U.K. votes to remain in the E.U..
There are a number of other events that investors will also be focused on this week, including the Bank of Japan and Bank of England decisions on Thursday, inflation and jobs data from the U.K. and retail sales and inflation data from the U.S., among others. The BoJ is expected to stand pat at this week’s meeting but markets are prepared for a surprise given the significant strengthening we’ve seen in the yen and the weakness in the economy and the inflation data that prompted Shinzo Abe to delay the sales tax hike for two and a half years.
For a look at all of today’s economic events, check out our economic calendar .
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