Brexit – could these be three of the biggest trades ahead of the vote?

Markets have had a rollercoaster year. Equities, forex and commodities have all swung wildly from a deep trough in February to fresh highs.

Among the macro economic factors at work – the Fed’s decision to raise rates, uncertainty over China’s currency – there is no doubt that Britain’s upcoming vote on European Union membership has moved the markets.

Here’s a look at three markets affected.

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Sterling

 

In forex trading, the biggest play is on sterling. For many, the Brexit risks make the pound the currency to avoid, but for others the added volatility makes GBP interesting.

Implied volatility for three-month cable options contracts rose sharply in Q1 as GBPUSD touched its weakest level in seven years in February, when the referendum was announced. But the pair has since rallied strongly as polls show support for the Remain side. This pair looks increasingly susceptible to polling figures in the run up to the vote, while speculation the Fed is ready to raise rates this summer is adding to the uncertainty.

Consensus estimates suggest the pound would fall sharply after a vote for Brexit, perhaps by as much as 20%. If Britain votes to stay in, analysts urge caution as fairly weak economic data in recent months is weighing and interest rates may need to go lower. 

Whatever the decision, all eyes will be on the Bank of England.

Stocks

 

The stocks to watch most closely are those in financial, property and retail.

Shares in several sectors could be hit if Britain votes to leave. Financials may be exposed as an out vote may call into question the City of London’s pre-eminent position as the leading financial centre in Europe. Companies may need to look beyond the UK, especially as many euro-denominated transactions currently conducted in Britain would likely have to shift to the continent.

Property may be another to take a hit. The sector as a whole has cooled in the run up to the referendum as buyers delay purchases until after the vote.

Pro-EU groups have warned that UK property prices would drop drastically in the event of a Brexit vote. This could have an impact on estate agents, house builders and the construction sector more widely. Equally, however, some economists have pointed out that a drop in the pound would make UK property much cheaper to overseas buyers, which may counteract any negative effects.

Finally retailers may find consumers tighten the purse strings quickly if Britain leaves. For example, the Bank of England and others are warning of large scale jobs losses – which would sharply affect spending UK wide.

Generally, investors may decide to pull back from the UK. Ernst & Young’s annual Attractiveness Survey shows 36% of the companies it surveyed think the UK will be a more attractive investment destination over the next three years. This is down from 54% a year ago, before the Referendum started to dominate the headlines.

Finally, various organisations and individuals, from the World Trade Organisation to US president Barack Obama, have warned that trade deals could take time to be completed with the UK if it leaves the world’s largest trading bloc.

Even Brexiters admit there would a short-term shock, but they argue the longer term benefits of freeing the UK from Brussels red tape would ultimately benefit UK firms.

Gilts

 

Gilts have had their best start to a year since 2001 and yields have been squeezed to all-time lows. Whatever uncertainty there is about the Brexit vote, investors are piling into UK debt. The question for traders is whether the market will weaken after the vote. A vote leave could drive out foreign buyers of British government paper, driving up yields. But the Bank of England may seek to insulate the economy from the shock of an Out vote by lowering rates, which could make gilts more attractive. 


Added market volatility means increased opportunity but also more risk. To reflect this, ETX Capital may be increasing margin rates on certain markets.