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As expected, volatility has picked up as we approach Thursday’s UK referendum on EU membership. Yesterday European stock indices surged higher following a batch of weekend polls which put into question the lead of the “Leave” campaign over “Remain”. Certainly, the “Leave” campaign appears to have lost its upside momentum. This could be due to complacency given the consistent lead the leavers maintained up until the end of last week. It could be that the appalling murder of MP and Remain campaigner Jo Cox has had an influence. It may be that Remain’s “Project Fear” (an even clumsier version of Bill Clinton’s 1990’s battle-cry - “It’s the economy, stupid!”) is having an effect, or that the “Leave” focus on immigration is turning people off. Whatever the reason, according to the latest opinion polls there’s little to put between the two sides (although it’s worth remembering that there are a significant number of potential voters who are still undecided).
  
Yet the market reaction over the last two days would suggest that a “Remain” win is in the bag. That’s not to say we won’t get a continuation of a “risk-on” move if the UK votes to stay in the EU. But it may end up being less extreme and shorter-lived than it would have been had the vote been held this time last week. The prevailing view seems to be that any “Leave” poll lead now won’t be big enough to indicate a win on referendum day as most people still undecided who turn up to vote are probably more likely to back the status quo, such as it is.
  
So what about gold?
  
Gold has fallen sharply today in a continuation of a move that began on Monday. As with other risk assets, this has been a result of repositioning as a “Remain” win looks the most likely outcome from Thursday’s referendum.
  PM Bulletin
   
Gold has now pulled back significantly from the near-two year high it hit in the middle of last week. However, it has still had a strong run so far this month having reversed the losses it suffered back in May. These gains followed the dismal Non-Farm Payroll in earlier this month. The poor data has pushed back expectations for tighter monetary policy from the Fed this summer. This was confirmed last week when the US central bank held off from hiking rates and downgraded their outlook for US economic growth. There is still an expectation of one or perhaps two rate hikes this year from the Fed, according to its latest Summary of Economic Projections. However the market view is considerably more dovish.
  
There has been renewed interest in gold as it appeared to bottom out in December following a four and a half year bear market. It has come back into favour as an increasing number of government and corporate bonds now trade with a negative yield, so making it increasingly attractive despite yielding nothing. It has also made gains as investors have raised their holdings as a response to increased global risks and uncertainty. The UK’s referendum is a part of that. So, while gold looks set to rally on a Brexit vote, there could be plenty of downside on a vote to remain. How much? Who knows? My biggest worry is that the bulk of the results come out during the Asian Pacific trading session when liquidity is already pretty shallow. Consequently, there’s the danger of a disorderly move in either (or both) directions. I hope we don’t get any stupid “flash crash “market moves which are quickly reversed. That kind of thing just destroys market confidence. But I wouldn’t bet on it not happening. 
  
In conclusion: this week’s market moves suggest that investors expect the UK to vote to stay in the European Union. If this is correct, then we can expect a continuation of the relief rally in global stock indices and sterling, and a sell-off in precious metals, bonds and other perceived “safe havens”. But whether this will build enough momentum to carry on through the summer is another matter entirely. In contrast, the odds have widened significantly on a Brexit. In consequence, and in contrast to a “Remain” vote, the market reaction to a “Leave” vote is likely to be both violent and protracted.
  
David: I hope we don’t get any stupid “flash crash” market moves which are quickly reversed. That kind of thing just destroys market confidence.
  
Disclaimer:
  
Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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