June 24, 2016

Markets Today: It ain’t over till it’s over

Despite stormy weather in London and the south east, turnout has been reported to be high and although markets appear to have ‘Remain ‘ as the most likely outcome, recent history suggests that voting outcomes don’t always end as expected.

After what has been a divisive campaign, Britain is almost done with voting on whether to leave the EU. Despite stormy weather in London and the south east, turnout has been reported to be high and although markets appear to have ‘Remain ‘ as the most likely outcome, recent history suggests that voting outcomes don’t always end as expected. As we about to press the send button, UKIP leader Nigel Farage has told Sky News it “looks like Remain will edge it” while a youGov exit poll has 52-48 for “Remain”.

In terms of markets, a couple of late polls released early in the overnight session showing “Remain” ahead appear to have contributed to a spike in risk appetite. A Populus poll reported a 55- 45% in favour of “Remain” and an Ipsos  Mori poll put “Remain” at 52% with “Leave” at 48%.GBP/USD made a new year to date high almost breaking the 1.50 mark (1.4947) and while it lost some ground later in the day, it still managed to climb a further 1.3% against the USD. On Thursday last week, Cable traded down to 1.4013 and now it is trading at 1.4880.

Risk assets enjoyed another positive night with European equities recording a fifth successive day of gains while in the US, the S&P500 ended above the 2100 level for the first time in a fortnight.

The USD is weaker across the board with the exceptions of the Yen and the Argentinian peso. Commodity currencies have outperformed with the NOK and AUD are at the top of the leader board, up 1.96% and 1.4% respectively. The AUD is back trading above 76c for the first time since early May and the NZD is back above 72c, currently trading at 0.7252.

Not surprisingly the risk on environment has pushed core global yields higher. The US Treasury curve is steeper with the move led by the back end of the curve.  Relative to Sydney’s closing levels, 10y UST are 4bps higher at 1.74% and 2y UST are 2.5bps higher at 0.7788%. Early in the session, 10y Bunds closed +3.2bps at 0.09% and 10y Gilts ended at 1.371%, 6.1bps higher.

Commodities had a mixed night. Brent and WTI oil are up 2.5%, gold is down 0.6% and iron ore also ended lower, down 0.8% ($51.09).

As for data releases, Eurozone manufacturing PMI came in stronger at 52.6 (51.4e) but services were weaker at 52.4 (53.2e). Jobless claims in the US fell to just 259k from 277k and US new home sales fell 6% in May.

Coming Up

Polling booths closed at 7:00AEST and now we await the first hard UK referendum results. These should start streaming in from around 9:30 AEST, but the bulk of the results are likely to come in between midday and 1:30 AEST.   If it becomes clear that polling for both sides is close, it could be a lot later than this before the result is known. This shouldn’t be later than 4pm AEST.

In terms of FX market reaction to the final result (or a confident view on the outcome) we’ve been saying that we thoughts GBP/USD would rally to the low 1.50’s and AUD/USD to perhaps 0.77 (implying AUD/GBP around 0.5050). Since we’ve almost reach these levels already, we struggle to think there’ll be too much upside. Yet in the event of a very convincing vote in favour of Remain (say 53% or more) we’d need to allow for GBP/USD adding at least a few more cents to the mid $1.50s and risk sentiment potentially taking AUD/USD up to perhaps 0.78.

Of course, if the opposite outcome looks like eventuating, the downside is that much bigger – we would look for a plunge to $1.30 or so in GBP/USD and for a spike in market risk aversion/volatility with AUD potentially challenging its 2016 lows (0.6827).

If there a vote for Brexit, no-one will care about anything else going on today; if ‘Remain’ prevails they’ll be less disinterest.  The BoJ June meeting summary of opinions are released this morning and the German IFO survey (which follows a good ZEW survey earlier this week), US durable goods orders and the final University of Michigan consumer sentiment survey are the main calendar items


On global stock markets, the S&P 500 was +1.34%. Bond markets saw US 10-years +6.06bp to 1.75%. In commodities, Brent crude oil +2.20% to $50.99, gold-0.6% to $1,257, iron ore -0.8% to $51.89. AUD is at 0.7632 and the range since yesterday 5pm Sydney time is 0.7532 to 0.7641

Good luck,

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