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    UK will vote to stay in the EU – Danske Bank

    Research Team at Danske Bank, suggests that that there base case has been and continues to be that the UK will vote to stay in the EU but also that polls will remain very close all the way up to referendum day on 23 June.Key Quotes“This is certainly the case where polls in recent weeks have been as close as ever.A couple of observations. First, there is a substantial digital risk in particular in EUR/GBP and UK equities. The range for EUR/GBP is 0.76 in 3M in case of a Bremain, which is our official FX forecast, and 0.90 in case of a Brexit. As such, the risks are heavily skewed towards a weaker GBP into the UK’s EU referendum.We expect a sharp drop in UK and European equities in case of a Brexit and a modest gain if the UK votes to remain in the EU. The risks here are more evenly balanced compared with GBP with the equity fall in case of a Brexit around double the size of a likely rally in case of a Bremain. We see US equities outperforming European equities in case of a Brexit but we do not expect US equities to rise from here. In a Bremain situation, we would expect European equities to outperform US equities.The recent collapse in core euro yields will continue and could even accelerate in a Brexit. However, the key driver in bunds yields is not Brexit risk but rather the scarcity of bonds to buy for the ECB.Hence, we expect any upside pressure on bund yields in case of Bremain to be limited given the increasing scarcity in Bunds and the fact that the ECB is being forced further out on the curve.We also want to stress our asymmetric market views, which we believe will hold both in case of a Brexit and a Bremain. We expect EUR/USD to fall over the coming three months with or without a Brexit albeit that the 1.11-1.15 range is likely to hold in case of a Bremain. The market is now pricing in a 25% probability of a July hike and a 47% probability of a September hike, which we believe is fair.Hence, Fed repricing has come a long way following the appalling May labour market report last Friday and we think there is limited downside for the USD for the time being. We think the FOMC meeting next week will be a ‘wait and see’ meeting and will deliver limited surprises. In case of a Bremain, we believe that the market will price in a Fed hike by September with a higher probability than currently which should cap any EUR/USD strength.”


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