Financial markets have been extremely volatile as we approach Britain’s referendum on whether to remain in the European Union or leave the group. Here is a recap of some key issues of a Brexit, opinions from thought leaders, and a look at how events are shaping up prior to the June 23rd vote.

Voices for Leave

Will there be a BrexitThe ‘Leave’ camp wants Britain to leave the European Union. There are several topics focused on by the leave campaign but a major theme is a more protectionist stance when it comes to immigration. They quote former Interpol head Ronald Noble’s warning “Europe’s open-border arrangement… is effectively an international passport-free zone for terrorists…”1 Supporters of this move cite loss of jobs and wages to immigrants, not to mention the fear (justified or not) of terrorism by immigrants.

Three main points for the Leave campaign are: 2

  • High Costs: Britain sends 350 million pounds per week to the EU for membership.2
  • Military: Britain would have to sign up to a European army.
  • Membership: Turkey is set to join the EU, which could bring even more migrants, of unknown origin, to Britain.

Voices for Remain

Prime Minister David Cameron, a staunch ‘Remain’ advocate, calls the three main points backing the Leave argument “lies”, countering that each point is false. He even goes so far as to accuse Brexiters of trying to deceive voters intentionally.3 Other Remain supporters simply view Brexit talk as rampant anti-immigration propaganda.

Several organizations, including the Bank of England and the International Monetary Fund (IMF) predict a recession for Britain if they leave the EU.4

Many influential economists, including ten Nobel Prize winners, advocated for the ‘Remain’ position in a letter to the U.K.’s Guardian newspaper.5 Other prominent figures in favor of the Remain stance include President Obama, J.P. Morgan CEO Jamie Dimon, and billionaire Warren Buffett.6

Current Odds of a Brexit

Brexit EUWhen we first covered the Brexit story back in early March, the pollsters showed a slight lead for the “Remain” camp, with a 55% to 45% lead. Polls fluctuated and last week it appeared that the Leave campaign had a slight lead, sending European markets lower. Today, it is virtually a tie.7

But the ‘poll’ that seems to carry the most weight is the betting odds, which shows how actual money feels about the outcome. This shows a significant lead for the Remain side. Today, the betting odds of a Brexit dropped to just 25%.8

The turn in sentiment can be traced back to last week’s brutal murder of Jo Cox, 41, a Labour MP and staunch ‘Remain’ supporter.9 The terrible act was carried out by Thomas Mair, a right-wing xenophobe, Brexit supporter and terrorist. Mair stated his name in last Saturday’s court session simply as “death to traitors, freedom for Britain.”10

Looking at it from the perspective of the vote, U.K. Independence Party Leader Nigel Farage claims the tragedy derailed the ‘Leave’ movement noting, “We did have momentum until this terrible tragedy.”11

This is certainly not to suggest that all Brexiters think like Mr. Main. The violent act did the opposite of the killer’s intention, which was to try and move Britain back to an ultra-national, isolationist position.

Market Impact

With the Remain vote now firmly in control before Friday’s referendum, global markets are breathing a collective sigh of relief. Equity markets went into collective celebration, with gains in markets across the globe. Most importantly, European markets stopped their recent skid and have rocketed up 2-3% across the board. The British pound sterling has also drastically strengthened against the U.S. dollar, up above 1.46. This is the largest increase versus the dollar since 2008.12

Another contributing factor to the surge is a scramble to cover short positions by traders and hedge funds. Some of these were outright bets against the pound in case of a Brexit (perhaps trying to replicate a famous George Soros trade against the pound back in 1992). Others were just taking off the various equity and currency hedges they held.

The Safe Haven Trade

When it appeared last week that a Brexit might occur, various ‘safe havens’ were snapped up by investors. Some viewed a Brexit as the first step in the unraveling of the European Union as a whole, which could cause equity markets to collapse. The so-called ‘safe haven’ trade occurs when market volatility and uncertainty causes investors to flock into more stable securities such as gold, U.S. Treasury bonds and defensive stocks. Even investment grade Canadian corporate bonds became en vogue, driving their yields down to just 2.56%.13  But, if the referendum votes to Remain, these safe havens could sell off sharply as the trade has gotten quite crowded.

We will know in a day how the vote plays out. We will keep investors updated on the referendum’s results and what this means going forward for Britain and the EU. Truth be told, the markets will likely find something else to worry about afterwards, whether it’s China’s debt levels or negative interest rates.

 

1,2http://www.voteleavetakecontrol.org/our_case
3http://www.bloomberg.com/news/articles/2016-06-19/cameron-accuses-pro-brexit-campaign-of-trying-to-deceive-voters
4http://www.telegraph.co.uk/news/2016/06/18/brexit-wont-cause-recession-michael-gove-says-as-david-cameron-w/
5http://www.theguardian.com/politics/2016/jun/19/eu-referendum-nobel-prize-winning-economists-warn-of-long-term-brexit-damage
6http://www.marketwatch.com/story/this-is-why-warren-buffett-jamie-dimon-think-the-brexit-vote-matters-2016-06-17
7http://www.telegraph.co.uk/news/2016/06/20/eu-referendum-poll-tracker-and-odds1/
8https://sports.ladbrokes.com/en-gb/betting/politics/british/eu-referendum/uk-european-referendum/220800266/
9http://www.vanityfair.com/news/2016/06/jo-cox-murder-brexit
10https://www.bostonglobe.com/news/world/2016/06/18/accused-killer-british-lawmaker-gives-name-death-traitors-freedom-for-britain/cEb3TX8ZufIyo5DwuNjKrK/story.html
11http://www.irishexaminer.com/world/nigel-farage-mps-death-has-taken-momentum-out-of-campaign-405841.html
12http://www.bloomberg.com/news/articles/2016-06-19/risk-appetite-revived-as-brexit-odds-ebb-pound-jumps-yen-falls
13http://business.financialpost.com/news/economy/safety-bonds-investors-seek-canadian-corporate-debt-as-brexit-roils-markets

 

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Is a Brexit Approaching?
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Is a Brexit Approaching?
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Financial markets have been extremely volatile as we approach Britain’s referendum on whether to remain in the European Union or leave the group. Here is a recap of some key issues of a Brexit, opinions from thought leaders, and a look at how events are shaping up prior to the June 23rd vote.
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