A ‘Remain’ win is already factored in by markets– but what if they’re wrong?
Today’s the day Britain goes to the polls to decide on the country’s future in the EU. Although it would appear financial markets have already priced in a ‘Remain’ outcome, if that turns out not to be the case, that leaves considerable potential downside – particularly for sterling and the FTSE.
As the majority of polls have suggested the ‘Remain’ campaign is marginally ahead of ‘Leave’ over the last few days, sterling rallied against the dollar to a three week high on Monday.
In addition, the FTSE, the UK’s blue chip index, which like numerous global indices was spooked by fears of Brexit when the ‘Leave’ campaign was in the lead, bounced back.
As it stands, it’s still very much neck and neck, with more swings highly likely. That said, the markets have favoured ‘Remain’ and are subsequently pricing it in.
Indeed, I hope this is the case, but as history has taught us, polls can be wrong. As such, should ‘Leave’ be victorious, there could be a considerable short-term shock for equities and the pound due to panic-selling.
In contrast, markets are likely to respond positively to a ‘Remain’ vote, but it will be somewhat mooted compared to a ‘Leave’ vote. I have seen estimates of a rally in sterling to $1.50 should Britain stay in the EU (up 3 cents), whilst a fall to $1.20 if we come out (a drop of 27 cents from a current $ 1.47).
It’s also important to consider that Brexit is just one of a handful of issues having an impact on the market at the moment. There is continued U.S. anxiety over the state of the American economy and falling profit margins; the risk of a rise in bank non-performing loans in China; and the let-down of negative interest rates in Japan and the euro zone to boost economic recovery. These issues are all ready to replace Brexit as predominant market concerns.
However, until then, today’s historic referendum is very much centre stage.