The price movements so far this week in financial markets suggest that a victory in today’s EU referendum for the leave camp has been given a very low probability, with the GBP/USD touching its highest level of the year this morning whilst the surge in the FTSE of late continues almost unabated. Rather than heeding caution and remaining on the sidelines until this potentially major event risk has passed, traders appear to be betting on remain prevailing and are positioning accordingly.
Near universal rise in stocks
Almost all the companies listed on the FTSE 100 are trading in the green so far today, with the index as a whole up over 100 points. Given the breadth of this rally all the sectors are in positive territory with not one area in particular excelling. Having said that, the usually volatile stocks - such as mining companies - are towards the upper echelons of the leaderboard, with Glencore the biggest gainer, currently trading more than 4% higher than yesterday’s closing level.
Discount for Brexit eliminated?
As a victory for remain would in fact see no tangible alterations to the present terms and conditions of the UK’s membership with the EU, the move higher seen in recent sessions for both sterling and UK equities is seemingly a reduction in the discount that was previously priced into these assets in the case of a Brexit. The question now is, what proportion of a discount remains and assuming the markets and bookmakers have called this correctly then how much more upside is there to come? Whilst this is no exact science the 5-6% rally since last week’s lows for these markets is quite possibly a fair proportion of the relief rally and it wouldn’t be overly surprising if, after a final surge once the result is final, we see some weakness due to profit-taking. This is based on the assumption that the markets are efficiently pricing in the probabilities of the respective outcomes, and if they are wrong the size of the move lower should a Brexit occur just increased even more.