Referendum polls are dictating the markets

June 21, 2016

The Referendum

Negative investor sentiment continued last week causing global equities to fall further. Last week polls for the referendum showed a Brexit as more likely. This has meant investors around the world have had to estimate what the implications may be for the UK, European and global economy. At this time of uncertainty, investors had fled to lower risk assets, shunning anything that might be adversely affected by a vote to leave. However, on Friday and over the weekend there has been a resurgence in support for Remain, leading to a rally of over 3% in the FTSE 100 on Monday this week. Movements of this magnitude are unusual and illustrate the importance investors are placing on the result.

UK Sterling Referendum Volatility


Federal Reserve

Monetary policy committees at the Bank of England and Federal Reserve met last week, both voted to maintain their current policies. The Federal Reserve highlighted concerns over slowing jobs growth in the US as well as a potential Brexit as reasons. However, the unemployment rate continues lower providing upward pressure on wage growth and potentially inflation. If this trend continues, the committee members will be obligated to tighten monetary policy faster than the current market rates imply. If the referendum passes with a Remain vote, it is predicted that there will be a further 0.25% increase in US interest rates in July. The Bank of England was not expected to increase rates at this month’s meeting. The future path of rates in the UK is difficult to predict given the level of economic and political uncertainty.

Gilt Market

UK Gilt yields reached a new historic low, with 10-year Gilts touching 1.068% at one stage last week. This rate is pricing in a potential cut in rates by the Bank of England and an expansion in quantitative easing; however, this is more of an outlier event than the likely scenario at the current stage. The gilt market has more likely been distorted by binary nature of the referendum outcome, QE in Europe and investors obliged to occupy this part of the market such as pension funds and banks. If inflation returns to more normal levels, Gilts will see a significant repricing.

Index Open Close Change % Change
FTSE 100 6115 5950 -165 -2.7%
S&P 500 2096 2071 -25 -1.2%
Dax 9834 9631 -203 -2.1%
Cac 40 4306 4193 -113 -2.6%
Nikkei 225 16601 15599 -1002 -6.0%
UK 10 Year Gilt Yield 1.215 1.205 -0.01 -0.8%


Germany ZEW current conditions summarising the economic outlook of large institutions will be released on Tuesday. These will be released along with the US new home sales will being announced on Thursday. And of course there is the EU Referendum on Thursday.