Daily Insight
Group Economics Macro & Financial Markets Research
21 June 2016
Markets become complacent about Brexit risk Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
UK EU Referendum - Opinion polls on the way the public will vote on the UK referendum on the EU have shifted over recent days. The average of the polls (from Bloomberg's composite indicator) on Monday showed a 45-42 lead for the Remain camp. This is a turnaround from last Tuesday when there was a 48-42 lead for the Leave camp. Brexit odds - as judged by bookmakers and tracked by Oddschecker - also reflect a change in trend. The odds for Brexit currently stand at just 26%, whereas last Tuesday the odds peaked at 43%. The driver of this change in trends is unclear. One potential factor is that there is often a bounce in favour of the status quo in the run up to elections and referendums. Some political commentators also note that the tragic killing of Jo Cox, allegedly by a nationalist, may also have swung opinion, though there have been few polls that adequately capture the period since. In any case the polls in general remain quite close and could still swing in either direction ahead of Thursday's referendum. So the uncertainty and hence risks surrounding this outcome still seem relatively high to us, even though our base case is still that the UK will opt to remain in the EU. (Nick Kounis) Global Markets - Financial markets moved to aggressively price out Brexit risk on Monday. Most asset classes have tracked the shifts in Brexit risk (for instance as measured by the Oddchecker indicator) over the last few weeks, not only UK assets, but also in Europe and globally. So it was no surprise that the decline in the Brexit odds went hand in hand with a significant shift in markets. Sterling and - to a lesser extent - the euro strengthened significantly. Equity markets soared, with the Euro Stoxx index up more than 3%, and the VIX came down significantly. At time of writing it was below 17, down from a peak above 20 early last week. Ten year Bund and Treasury yields rose significantly, while peripheral government bonds saw a major tightening in spreads. Although the direction is no surprise, the extent of these moves is. For instance, cable is approaching the 1.47 level, up from 1.41 last Tuesday. At these levels it is not far off its peaks during the year and there is very little Brexit risk premium priced in. Given that the polls are still close and that uncertainty on the outcome is still high, it therefore looks as if markets have now become a little complacent about Brexit risk. This obviously sets the scene for much sharper movements in case of a Leave vote, if markets hold on to these levels. (Nick Kounis) Credit - The ECB published it had bought EUR 1.9bn of corporate bonds last week. This is in line with our estimate of EUR 1.8 to 2bn. Indeed, it equates to purchases of around EUR 7.5bn a month (1.9 * 4 = 7.6), which is the monthly amount that we are projecting on average for the programme going forward. This was the first time that the ECB published data that considered a full week of purchases. Last Monday, only 1 day worth of purchases were included due to the T+2 settlement convention. We think this a very good result as the ECB had to operate in difficult market conditions. Uncertainty surrounding the outcome of the Brexit referendum has led to increased volatility in markets lately. As a consequence, primary market activity was very subdued as well. Only one CSPP-eligible deal settled last week. We consider healthy new issue volumes in the primary market a necessary condition for a successful CSPP. The high pace of the corporate purchases also means that the share
Insights.abnamro.nl/en
Bloomberg: ABNM
2
Daily Insight - Markets become complacent about Brexit risk - 21 June 2016
of the PSPP in the asset purchase programme is decreasing somewhat helping to ease the pressure off the stretched SSA market. (Hyung-Ja de Zeeuw) ECB court ruling preview - The German constitutional court will today deliver its opinion on five cases in which the plaintiffs argued that the ECB is stepping outside its mandate by setting up the OMT programme. While the OMT was never used, it was set up to deliver on the infamous 'whatever it takes' speech by President Draghi. Originally, the OMT was devised so that the ECB could buy an unlimited amount of bonds of countries, which lost access to the market or had to fund themselves at high borrowing costs. Today’s assembly is the next episode of a long lasting discussion on the legality of the OMT. Last year, the European Court of Justice said that the ECB should have considerable leeway in the execution of its monetary policy. The German court will now have to rule if this opinion is permissible under German law. Although the German court has no say over the ECB, it can influence the Bundesbank and can therefore indirectly decrease the effectiveness of the ECB’s toolkit. If the German court were to decide that the OMT is not allowed under German law, this would mean that the ECB would be deprived of a safety net for specific countries which would have lost access to the market. Especially with a possible Brexit and contagion risks looming, the ECB would have less flexibility to act if peripheral bond spreads would widen sharply.(Kim Liu)
3
Daily Insight - Markets become complacent about Brexit risk - 21 June 2016
DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. Š Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO
4
Daily Insight - Markets become complacent about Brexit risk - 21 June 2016