The rollercoaster ride has just begun, fortunately enough it’s trajectory was to the upside on Monday, sending all risk assets higher. The FTSE 100 gained 3.04%, meanwhile Germany’s DAX and French CAC ended their sessions up 3.43% and 3.5% respectively. The more interesting move was seen in the Pound which surged by more than 2% to post its best daily advance since 2008 financial crisis. On the other side, safe havens retreated with bonds and gold declining from recent highs.
The surge in risk appetite was due to two opinion polls showing that the remain camp was regaining some momentum ahead of Thursday’s UK referendum on whether to stay or leave the European Union. Many had attributed the shift in voting polls to the tragic murder of Labour politician Jo Cox on Thursday, however I still believe the vote can still go either way and it’s going to be one of the longest weeks for markets until we have the voting results.
In such conditions, markets reactions tend to be exaggerated on the upside and similarly to the downside, but price action seems now more skewed to the downside as little risk premium is still priced-in into the run-up to the vote. Although high volatility can grasp lot of opportunities for traders, the risks are also very high, so if you are fainthearted, avoid trading until the picture becomes clear.
Britain in-out out trade will continue to denominate the factors impacting markets, however we have to listen on what Fed chair Janet Yellen has to say today in her semiannual testimony to Congress. Her testimony comes less than a week after the Fed pared back growth forecast and interest rates expectations for 2017 and 2018. Probably she doesn’t have a lot to add on monetary policy after last week’s Fed dovish stance, but I expect her to be slightly upbeat to re-manage markets expectations which have become too skeptical towards Fed tightening. According to CME’s fedwatch markets see the first rate hike in 2016 no earlier than December.
Mario Draghi also speaks to the European Parliament today, but given how much he spoken earlier on subjects such as economics and monetary policy, there’s only little new update he can provide, thus expect his speech to be neutral to markets. On the economic data front, German ZEW will offer the latest update on how institutional investors feel with only couple of days to the UK vote.
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