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* Historic vote is just hours away and already this is a Category 5 storm in the making *
By Oren Laurent
President, Banc De Binary
The world is watching with baited breath as Britons prepare to vote on Thursday, June 23. The upcoming referendum is proving to be the most divisive of all votes, with sharp contrasts between the ‘remain’ campaign and the Brexiteers. Several heavyweight politicians have lined up to lend their support on either side of this debate, with US President Barack Obama and UK Prime Minister David Cameron urging voters to reject a Brexit. Indeed, they cite the unknown ramifications of a break from the European Union in their argument to voters.
Former London Mayor Boris Johnson and several ranking Tory officials have urged Britons to vote for a Brexit. The Brexiteers stress cost savings, autonomy and secure borders that would result if the UK votes to break from the EU. A recent spate of terrorist attacks in France, Belgium, the US and elsewhere has prompted calls for tougher borders – something which is virtually impossible with the free movement of people and goods in the European Union. Another high-ranking official in the form of IMF chief Christine Lagarde also came out swinging recently. She has been hard at work discussing the pitfalls that lie ahead for the EU and Britain.
Polling Data Shows a Tightening of the Gap
Polls have proven unreliable in recent weeks, with sharp swings between the remain and the leave campaigns evident in the latest numbers. According to ComRes (a polling company), the main concern in the UK is the uncertainty related to a Brexit. While many Britons favour a break from the EU, the implications of such a move are terrifying. According to this polling company, 40% of voters are extremely anxious about the prospect of a Brexit. Those voting in favour of remaining in the EU are less anxious with just 33% of voters feeling uneasy. Only 41% of Conservative voters feel anxiety about leaving the EU, while 52% of the Labour voters feel anxiety.
The murder of Labour MP Jo Cox had an effect on the vote, as it shifted momentum away from Brexiteers towards Bremainers. The weekend poll by Survation indicated a swing from to the remain campaign with 45% wanting to remain and 42% calling for a Brexit. If the Brexit camp get their way, it will be a major setback to the 28-nation bloc. Other polls, including the one from the Sunday Times (YouGov) on Thursday and Friday last week showed the remain campaign in the lead with 44% of the vote and the Brexit camp with 43% of the vote.
The poll that turned the tables upside down was the ORB poll recently which reflected a strong shift in favour of the Brexit camp. Indeed, the BMG Final EU Referendum poll (telephonic survey) indicated 46% of respondents wanting to remain and 43% of respondents wanting to leave. The survey also found that 11% of those polled had no opinion just yet. The data was compiled between June 10 and 15 with a pool of 1,043 UK residents.
According to the IMF, the effects of a Brexit would be negative and substantial for the United Kingdom. But the long-term effects would also be devastating for the European Union which relies heavily on the UK’s financial and political contribution for its well-being.
How Are Markets Reacting to the Brexit Melee?
Several financial assets have gained favour in recent weeks as a result of the upcoming referendum. These include, but are not limited to gold. The precious metal is currently trading close to the key $1,300 per ounce level. This has proven to be a major resistance level for gold, after having reached a 2-year high of $1,318.90 per ounce. That the price of gold has been climbing sharply of late is no coincidence: the greater the implied volatility and anxiety with respect to the vote, the higher the price of gold.
As a traditional safe-haven asset, gold reacts positively to negative news. At the close of trade on Friday, June 17, gold had racked up its third week of gains. However, futures for August delivery ended 2% lower, and much of the recent negativity we are seeing in the gold price is a direct result of the Jo Cox killing, the closing of the gap between remain/Brexit sentiment and to a lesser degree the comments made by high profile politicians and leaders. The gold price was naturally impacted by the decision of the Federal Reserve Bank to maintain the federal funds rate at 0.25% – 0.50% over the short to medium-term. Janet Yellen made reference to the upcoming vote as a reason for not hiking interest rates.
The British pound has been hit hard by stress factors owing to the Brexit vote. The sterling is showing its highest implied volatility in a long while. Implied volatility is approaching fever pitch levels and the sentiments of major world leaders are not helping either. The World Bank, the Bank of England, the OECD, the IMF and the WTO are in favour of Britain remaining in the European Union. The latest Financial Times poll (Thursday, June 16) indicated a 47% leave majority and a 44% remain minority. With such varying opinions, it is near impossible to anticipate the likely outcome of the vote. Brexiteers claim that by leaving the European Union, Britain will save itself GBP 8 billion every year from regulation alone. The IMF counters that argument by saying that income and trade losses would totally upend the savings generated.
Winners and Losers Heading Into Brexit Week
The countries most likely to be impacted negatively by a Brexit include Belgium, Malta, Ireland, Luxembourg, Cyprus and the Netherlands. Further, the IMF cautions that the EU as a whole cannot possibly benefit from a Brexit. However, the relocation of major financial enterprises from the world’s financial epicentre – London – to capitals throughout Europe may bring benefits over the long-term. For the week ending Friday, June 17, Wall Street indices fared poorly. The Dow Jones lost 0.32% and closed at 17,675.16. The NASDAQ shed 0.92% and closed at 4,800.34, and the S&P 500 index lost 0.33% to close at 2,071.12.
In Europe, the picture was very different with strong gains being reported as the decreased likelihood of a Brexit appeared to take shape. The DAX closed 0.85% higher at 9,631.36, the French CAC closed at 4,193.83, up 0.98% and the all-important FTSE 100 index broke through the critical 6,000 level by gaining 1.19% to close at 6,021.09. Gold was last trading at $1,292.80 an ounce, silver at $17.52 per ounce and copper was up at $205.10 per pound. Government bonds and gold continue to be the go-to assets of choice for traders and investors, and stocks of mining companies such as Goldcorp are also enjoying the benefits of greater volatility and anxiety in markets.
Note that this column does not constitute financial advice.
