Markets Today: The Fear

Friday night, Sterling was hit hard soon after London had shut shop for the week, on the publication of an (internet) poll by ORB of over 2000 respondents for the UK Independent newspaper, showing a 55/45 split in favour of ‘Leave’.

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Since Australia went home on Friday evening, global markets have traded with a significant ‘risk-off’ tone, much of the negative sentiment pervading equities, bonds and currencies emanating from incoming UK EU referendum opinion polls. We are now 10 days away from polling day.

In Friday night, Sterling was hit hard soon after London had shut shop for the week, on the publication of an (internet) poll by ORB of over 2000 respondents for the UK Independent newspaper, showing a 55/45 split in favour of ‘Leave’. In Monday’s London session, the pound was recovering during the European afternoon on rumours that an incoming ICM polls for the Guardian (that two weeks ago shocked markets by showing the ‘Leave’ camp gaining significant ground) would now show ‘Remain’ back in the lead.  Wrong.  Just after the London close, so 2:15 AEST, the Guardian revealed that the results of a pair of ICM polls – one telephone and one on-line – shows ‘Leave’ enjoying a 53/47% advantage. Having rallied bout 1 ½ cents on the earlier Remain’ poll rumour, ‘cable’ promptly gave back a cent of that.

The latest ‘poll of polls’ tally published by Bloomberg and which doesn’t distinguish between phone and internet methodologies and includes ‘don’t knows’ or ‘won’t say’, shows 46/42.5 in favour of ‘Leave’.   See Chart of the Day.

The risk-off mood is reflected in a fall in US stock indices by between 0.75% and 1%, despite the 45% jump in the share price of LinkedIn on news that Microsoft plans to pay $26bn for the networking site. The VIX gauge of S&P options volatility has jumped 4 points to 21 – it’s highest since 25 February. This follows a near three-point jump last Friday and now leaves this measure above its long term average of about 20.  In this context we’re a little surprised to see the AUD up on the day – though still below where Australia left it last Friday – albeit it has fallen away in the New York afternoon.

The big dollar is a touch weaker in index terms with the narrow DXY index down about 0.2%, through this is largely because the yen continues to display its pre-eminent safe-haven characteristic with USD/JPY down some 0.75% (though not yet down through its early May low of ¥105.55). The Nikkei lost 3.5% on Monday.  Treasury bond continue to attract safe haven flows with 10s down to 1.611% while gilts are rallying on the view the Bank of England would have to ease again if the UK votes ‘Leave’, even if the pound gets hammered.

Coming Up

Incoming UK EU Referendum opinion polls will continue to hold markets in thrall and remain a significant source of volatility not just in GBP but risk sentiment more broadly.

But its also a big week beyond this, with the Fed meeting Today and Wednesday (so outcome, including press conference and latest projection materials, coming in the early hours of the Australia/New Zealand morning).  The idea of the FOMC teeing up markets to expect a July move and subject to no ‘Brexit’ vote has had the kibosh put on it by the soft May employment report. Yet we doubt the Fed will want to put market right off the scent of this risk, since a  UK vote to ‘remain’ followed by a strong rebound in June payrolls could quickly alter the landscape once more.

We also get the Bank of England, where the Governor has an opportunity a week before the referendum to say what he thinks market consequences of the vote could be and potential policy responses. The Bank of Japan also meets (Thursday) and where it’s very much up in the air whether we see additional easing steps. The yen will be sensitive to whatever the outcome is.

Locally, the NAB business survey is today, Labour Force survey on Thursday and – an hour after that later – RBA Governor designate Phil Low speaks on ‘Recent developments in the Australiana and global economies’.

Overnight

On global stock markets, the S&P 500 was -0.81%. Bond markets saw US 10-years -2.91bp to 1.61%. In commodities, Brent crude oil -0.93% to $50.07, gold+0.9% to $1,285, iron ore +0.7% to $52.91. AUD is at 0.7387 and the range since yesterday 5pm Sydney time is 0.7381 to 0.741.

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