R-Day Is Here, But Can It Prove Anti-Climactic?

Referendum is underway. The capital markets are continuing the move that began last week with the murder of UK MP Cox.  The tragedy seemed to mark a shift in investor sentiment. Sterling bottomed on June 17 just ahead of $1.40.  Earlier today in Asia, after more polls showed a move toward remain, sterling rallied to almost $1.4845, its highest level since last December. 

The market continues to put anticipate the UK stays in the EU and has bid sterling to new highs for the year.  More broadly, the dollar and yen are heavy against the major and emerging market currencies. Equities are rallying.  It is the fifth consecutive advance of the MSCI Emerging Market equity index. The MSCI Asia-Pacific Index was up 0.75%, while the Dow Jones Stoxx 600 is 1.4% higher, led by telecoms and material sectors.   Core bond yields are 2-5 bp higher, while peripheral bonds yields are 4-6 bp lower, though Greek bonds, which the ECB will begin accepting again as collateral, are seeing an 11 bp decline in 10-year yields. The high beta emerging market currencies, like the Russian ruble, the South African rand, and Mexican peso are leading the EM, followed by Eastern and Central European currencies. 

Sterling has consolidated its latest gains, and also the momentum has stalled, it remains in the upper end of the ranges seen over the past two sessions. The US dollar is broadly lower against all the major currencies save the Japanese yen. The dollar traded on both sides of yesterday’s range against the yen. It has been unable to make much headway above JPY105. It appears to be carving out a little base around JPY104. There has been some indication that the BOJ may have been holding back on its rinban and QQE operations in the JGB market as if to prepare a bigger war chest in case of a Brexit vote. 

There are a couple of points to make about the UK referendum. First, the betting and event markets have moved well ahead of the polls.  Nearly all the last phone polls show remain ahead, while most of the online surveys show leave ahead. We note that speculator in the futures markets had been adding to gross long sterling positions in the week before the market actually turned.