Secession/Breakup
The U.K. vote is a major blow to the cause of European integration. Fears that "others are next" are likely to put upward pressure on peripheral European bond yields, potentially setting the stage for a self-fulfilling debt crisis. Risk assets are likely to recover some of today's losses over the coming trading days, but the risk to equity prices is now to the downside. Investors should assume a more cautious stance.
The people have spoken: they want the U.K. out of the EU. The political and economic uncertainty will weigh on the pound and European currencies, which will help the dollar. Commodity currencies are proving resilient, sniffing out a wave of reflation. The G7 gave Japan a green light to intervene. Buy gold in yen terms.
If the U.K. ultimately exits the EU, it will be a major break in the 70 years of European integration. Multipolarity will be reinforced, increasing global geopolitical risk. We expect global risk assets to start taking cues from Europe, not the Fed and China. However, risks of N-Exit - that other EU member states follow suit - may be overstated.
Among the myriad of troubling signs for the global economy, some developments on the inventory and deflationary fronts could point to a brighter future. While still not our base case, those factors need to be monitored. With Brexit over and done with, we are reshuffling our GBP portfolio. Remain bullish EUR/USD. Go short CAD/NOK.
There are not two possibilities in today's vote, but four: Clear Remain; Narrow Remain; Narrow Leave; Clear Leave. We discuss the distinct repercussions from each.
We prefer to fade the recent fall in yields by moving to neutral on U.K. Gilts and underweight Australia, while maintaining a benchmark overall stance on portfolio duration.
This fact sheet outlines what you need to know ahead of the U.K.'s referendum on EU membership. The "Leave" camp has taken the lead, and while the polls likely overstate its position, the status quo faces serious risks.
The Brexit vote is a coin toss. We introduce a simple model to estimate the effect of a "stay" or a "leave" vote on various currencies and assets. A "leave" vote could cause GBP/USD to fall to 1.32 or less, creating a tactical buying opportunity. Extreme GBP implied volatility suggests that selling vol is attractive. The Fed decreased its rate projections.
The "reflation trade" is breaking down. Brexit risk is partly at fault; the bigger issue is the lack of a global "spender of last resort." Globally, savings must equal investment. The problem is that desired savings are rising and desired investment is falling. Policy is increasingly reflecting this reality: Fiscal austerity is yielding to stimulus, the obsession with fighting inflation replaced with talk of helicopter money/other radical solutions. Bond yields are likely to stay depressed for the next two years, but could then begin to rise much more than current market expectations. We are closing our short EUR/JPY trade.