With less than 24 hours to go before Britons head to the polling booths to decide on their EU membership, several markets are suggesting that the outcome is not hanging in the balance as finely as the latest polls indicate. Assuming that a victory for the leave campaign would pave the way for significant declines in both the pound and UK equities, the strength of both of these indicates that the probability of a Brexit scenario is nowhere near as high as shown by the recent polls.
Significant movements under the surface
Despite the FTSE 100 index moving only marginally higher so far this morning, there’s been several significant moves in individual stocks. Insurance companies are enjoying decent gains with Direct Line, RSA Insurance Group and Prudential all firmly in the green. Associated British Foods is off by close to 100p since yesterday’s closing level and is the biggest faller on the index, declining more than 3% so far. With the UK blue chip index trading at its highest level in almost a fortnight shortly after this morning’s open, the market has recovered the vast majority of recent losses and looks to be offering little by the way of a discount as to the chances of a Brexit. Therefore the upside potential for a relief rally should the remain vote come out on top is not as great in scale as it was at the beginning of last week.
GBP/USD falls back from 2016 high
After touching its highest level of the year yesterday the GBP/USD is paring back some its gains this morning, but in a similar vein to the FTSE is showing few signs of worry heading into tomorrow’s EU referendum. As is the case with its stock counterpart, the rally so far this week is seemingly pre-emptive of a victory for the status quo and therefore also implies that a significant portion of a relief rally may have already played out. Along these lines, further moves higher would be expected but the scope of appreciation is less significant due to some of the move already being priced in. We could be seeing a classic example of buy-the-rumour-sell-the-news developing, with a rapid elimination of any discount in the pound and UK stock market seeing both surge initially higher if remain prevails but once this has vanished and there is no material change there’s little to suggest this would provide the catalyst for a prolonged rally. On the flip side a majority vote for Brexit on Thursday would have even greater downside potential for sterling and UK equities due to the dismissive pricing of this eventuality.