Bremain exuberance shows no signs of waning

22 June, 2016

While the opinion polls continue to remain mixed with respect to the UK referendum, equity markets appear to be sailing on serenely as we lead up to tomorrow’s vote, and we mercifully enter the final day of campaigning. The last few weeks has proved to be extremely divisive and a period most people would probably choose to forget, given that to a large extent it has brought out the worst on both sides of the argument.

You would like to think in the aftermath of tomorrows vote the next few days and weeks could well provide an uncomfortable period of reflection for politicians on both sides of the argument, but we could well find that whatever the outcome the debate will rumble on and scores could well get settled.

While stock markets continue look to another positive open the pound also managed to make a new multi month high against the US dollar, before slipping back a touch as some of the recent exuberance started to give way to a little bit of caution, and profit taking.

With more opinion polls expected throughout the day we can expect to see further intraday volatility as the betting markets continue to diverge away from the polls. We will know soon enough if the recent market exuberance at the expense of the deadlocked polls is justified, or turns out to be a fool’s errand.

A continued recovery in bond yields gave financial shares a boost as the German bund spent its third successive day back in positive territory, while US and UK 10 year yields also continued their recent rebounds.

With little in the way of other drivers stock markets didn’t appear too perturbed by warnings from both ECB President Mario Draghi and US Federal Reserve chief Janet Yellen yesterday that the consequences of a UK vote to leave the EU were extremely difficult to assess, and that it would be very hard to predict the economic impact.

This lack of precision from two of the most eminent central bankers in the world with respect to the global consequences of a vote to exit was a refreshing outbreak of honesty in contrast to the very precise warnings that the UK public has been bombarded with from a range of economic bodies from the IMF, to the OECD to the UK Treasury over the past few weeks.

Janet Yellen did admit that any potential fall-out could hinder the Federal Reserve’s ability to continue with its tightening cycle, which doesn’t exactly chime with recent comments by St. Louis Fed President James Bullard who suggested as recently as last month that the UK vote wouldn’t affect US policymaking decisions, though he has been a little bit like a weather vane on this one in recent weeks.

Ms Yellen in testimony to US lawmakers reiterated the tone of her press conference last week where she indicated that she remained concerned about rising uncertainty in the global economy and the need to remain cautious and flexible.

The lowered growth forecasts as well as lowered rate projection paths do appear to indicate that the Fed is concerned about the glide path of the US economy, though she still remained fairly upbeat about the economic outlook but gave no clues about when to expect the next move on rates.

July still remains highly unlikely with a 10% possibility priced in while September only has a 31.6% probability, though this date is likely to be the most data sensitive.

She isn’t likely to deviate from this tone in the second day of her testimony later today.

EURUSD – after peaking at the 1.1400 area this week we’ve slipped back again, and run the risk of a move back to the trend line support from the December lows just above the 1.1100 area, which we bounced off last week.

GBPUSD – the pound posted its highest level since early January at 1.4785 yesterday before slipping back again, but hasn’t yet closed above the 200 day MA. A move through here could well trigger a move towards 1.4900. Pullbacks could well be sharp but should find support at the 1.4330 level.

EURGBP – we’ve seen further euro weakness yesterday dropping through the 0.7690 area and remaining on course for a retest of the 0.7560 area and May lows. We need to recover back through the 0.7760 and 0.7830 area to stabilise.

USDJPY – we appear to have found a bit of a base around the 103.50 area and look set to test the 105.50 area, which was support on the way down. The bias has shifted slightly while below the 200 week MA which is now at 106.25. We need a recovery through the 105.50 area to help stabilise. Or risk a move towards 100.70 and the 2014 lows.

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