One word = Brexit
Week Commencing Monday 20th June 2016
Overriding Market Themes
Given it is Brexit week, all news stories are converging on the UK. We start with the IMF stating that the UK leaving the EU would hit British living standards, stoke inflation and wipe up to 5.5 percent off GDP. The IMF then looks at two future scenarios. In the first, Britain rapidly agrees a new trade deal with the EU; in the second, the negotiations are more protracted and Britain eventually settles for basic World Trade Organisation rules. In the first scenario, sterling depreciates by 5 percent. GDP growth slips to 1.4 percent in 2017 and unemployment rises slightly. In the second scenario, the UK falls into recession next year. Unemployment hits about 7 percent by 2018, up from around 5 percent currently. Real wages will stagnate, mainly because of high inflation. However, Britain’s trade balance will move into a small surplus as Sterling depreciates.
The Bank of England continues to face flak from the Vote Leave camp, with Bank of England governor Mark Carney hitting back at critics warning him about commenting on the referendum. This comes as the Bank of England issued a fresh warning that a vote to leave risked knocking economic growth, pushing the pound sharply lower and sending shockwaves through the global economy. This comes as the European Central Bank has pledged to flood the financial system with euro liquidity if credit markets seize up after a Brexit vote. The reassuring words put to rest many fears that the ECB might withhold full cooperation from the Bank of England in the poisonous political mood after a withdrawal vote. There had been fears that a funding crunch for international banks in the City could immediately follow a Brexit situation. The ECB, coupled with the Bank of England go a long way to reassure financial markets that liquidity will not be a problem should the UK population vote to leave.
As campaigning resumes today after the murder of Jo Cox, Remain is attracting support once again, pushing the bookmakers odds of a remain up to 73 percent. The recent Survation poll, which was gathered on Friday and Saturday, shows Remain on 45 percent with Leave on 42 percent. Opinium have the two sides level while Yougov put Remain ahead by one. The new polls and market moves indicate a change in momentum, after several weeks when support for leaving the EU appeared to be growing. It's notoriously difficult to persuade people to reject the status quo in referendums, however with the Sun newspaper recently declaring its support for Brexit, anything is possible.
GBP This Week
The UK’s referendum on EU membership is the only event of note, and given how this is probably the most significant event in financial markets this year, all eyes will focus on the UK on Thursday. Local authority and regional results are likely to be released late Thursday/ early Friday, with a general direction ascertained by 3 am Friday. As such, expect severe volatility on Friday.
USD This Week
We expect the USD to trade range bound as the UK EU referendum looms, following the relatively dovish June FOMC. As with the rest of the world, data releases are unlikely to move markets as traders wait to see the outcome of the UK’s EU referendum. In terms of data however, we look for the Conference Boards’ index to edge down by 0.1 percent on the month. On Friday we expect total orders for durable goods to have increased by 0.7 percent on the month in April, while the University of Michigan consumer sentiment index should be revised down to 94.0 from 94.3.
EUR This Week
Euro areaflash PMI’s are all due to be released on Thursday however these will be eclipsed by the UK’s vote on EU membership. We expect the Euro area PMI’s to edge down in June to 52.9, owing to slightly weaker confidence in the manufacturing and services sector. Finally, we expect German IFO on Friday to continue to indicate strong growth in Germany.