Brexit - Six signs that markets are fretting over the EU referendum

Market volatility is on the rise ahead of Britain’s referendum on EU membership. In stocks, currencies and bonds, there are signs of stress as investors brace for the vote on June 23rd.

Here are 6 signs that markets are getting twitchy:

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Vix Up

 

The CBOE Volatility Index, a gauge of volatility in the S&P 500, hit a four-month peak in June, topping its long-run average of 20 for the first time since the end of February. The Euro Stoxx 50 volatility index has nearly doubled from 20 at the start of June to hit 38.

In August, the surge in the Vix corresponded with an 11% drop in the S&P 500. This time the US index appears sturdier.

Pound insurance

 

Sterling’s one-month implied volatility – as measured by the cost of insuring the pound against sharp swings – has risen to post-crisis peaks. According to Bloomberg, investors are piling into insurance against the pound suffering a sharp decline against the dollar in the event of Brexit. It says the amount wagered on the pound dropping below $1.35 has doubled in the last three months. Bloomberg says £25 billion has been bet this year on options contracts that would deliver a profit if the pound dipped that far.

G7 currency volatility

 

Led by the choppy trading in the pound, a gauge of developed nation currencies is showing volatility at multi-year highs. According to Bloomberg, JPMorgan Chase & Co’s G7 currency volatility index is further apart from the corresponding measure of emerging market currencies than at any time since May 2013.

Three-month implied volatility touched on 12.8%, the most its exceeded EM currency volatility in more than three years.

Bond market

 

Market jitters can be seen clearly in the bond market, where a rush to safety has driven down the yields on UK, Japanese and German paper to record lows.

The German 10-year bund sank into negative territory for the first time ever this week, while UK 10-year gilts slid to just 1.18%. Peripheral yields have done the exact opposite – yields in Polish, Greek, Portuguese and Hungarian paper have all soared as risk-averse investors flock to relative safe havens.

As we looked at recently, the bond market is in uncharted waters, with Janus Capital’s Bill Gross describing the $10 trillion of negative-yielding government bonds as a “supernova that will explode one day”.

Euro Pressure

 

It’s not just the pound that’s seeing big swings in risk premiums – the difference between one-month call and put options for EURUSD has widened to its most in five years. The so-called one-month risk reversal is now at its highest level since the depths of the Eurozone crisis in 2011.

The euro has displayed safe haven characteristics in the past, but fears of contagion from Brexit mean it’s on a less sure footing as investors weigh the potential breakup of the Eurozone.

Bank Stocks Off

 

UK banking stocks have fallen since the end of May as Brexit would likely hit the UK’s financial giants. Funding costs would rise without passporting and Bernstein reckons Barclays share price could dive as much as 40%, while Lloyds and RBS could fall by 35% and 25%.

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