Daily Market Update: "Remain" risk rally takes hold three days early?
Risk appetite returned with a vengeance yesterday as markets reacted to the weekend’s opinion polls.
The latter signalled that the Leave campaign has lost some of its recent momentum. Various newspapers also came out to recommend Leave or Remain, with some splits between daily and Sunday editions. For Remain: The Times, Economist, The Mail on Sunday, Observer, Mirror, The People. FT also supports Remain. For Leave: Sun on Sunday, Sunday Times, Sunday Express, Sunday Telegraph. The Sun came out last Monday for Leave. Two more polls were released late last night after markets closed. A YouGov poll for the Times newspaper showed Leave at 44% and Remain on 42% with the remaining 14% classed as “Don’t Knows”. Meanwhile an ORB survey for the Daily Telegraph, which stripped out the don’t knows and focused only on those certain to vote had Remain on 53% and Leave at 46%. The Financial Times poll of polls has both sides registering support from 44% of voters. The vote looks to be settled by the “Don’t Knows”. Past experience of referenda suggests that undecided voters traditionally plump for the status quo option – in this case Remain.
European equities rallied on the back of yesterday’s news with the Euro Stoxx index closing 3.3% higher with the UK’s FTSE 100 up 3%. Sterling posted its biggest one-day gain against the dollar in almost eight years. Over the last two trading days sterling had jumped by 3.5% - its fourth-largest two-day gain since 1971. Over the last 24 hours GBP/USD has risen by 1% up from $1.458 to $1.473. EUR/GBP continues to drift lower and last night briefly dipped below 77p where it continues to hover this morning. This compares with 77.8p at yesterday’s open. EUR/USD is broadly unchanged over the last 24 hours at $1.133. Yesterday’s risk rally with both equities and sterling represents a significant part of the correction anticipated following a Remain vote. The bookies are even more convinced than financial markets that the UK will opt to stay in the EU. Late last night Ladbrokes said the odds of a Remain vote had shortened to 2/7, indicating a 74% probability. Some 95% of all referendum wagers in the previous 24 hours had been placed on voters opting to stay in the EU. Last week bookies assigned a 40% chance of a vote for Brexit.
ECB policymakers will meet today to discuss how to ensure that a possible British exit from the EU would not snuff out the Eurozone’s tentative economic recovery. The ECB believes it has the tools to weather the immediate aftermath of a Brexit and ensuing global market turmoil. The news story is carried in today’s Financial Times. Another event worth watching concerns the legality of the ECB’s Outright Monetary Transactions programme, whereby the ECB purchases the sovereign debt of Eurozone member states. The German Constitutional Court will today make a landmark judgment on the issue.
Looking at the day ahead, the key economic data release is the German ZEW survey. Financial analysts reported a pick-up in sentiment regarding current conditions in May. Conditions are expected to remain broadly unchanged in June. Meanwhile the forward looking expectations component suggests a further modest deterioration in the economic outlook for the German economy. Yesterday the German Finance Ministry and the Bundesbank warned that German economic growth was likely to slow in Q2 and the second half of 2016 after a robust start to the year. Elsewhere, in the UK we have the latest set of public finances data. Remember before the Brexit debate heated up there was significant concern about the health of the UK public finances. This concern has been put on the back burner for now. In the US, Janet Yellen is due to begin her two-day testimony to US congress on monetary policy.
Our priority is to serve our customers and we will be here late on Thursday evening to answer any customer calls. We will also be available early on Friday morning as the result becomes clear. We would also like to remind our Ulster Bank Trade enabled customers that they are able to book FX deals on a 24 hour basis through the week until 10 pm on Friday night. Updates will be available on our twitter feed @UB_FXMarkets.