UK and Europe
After a slow start, markets picked up in the afternoon as the perceived chance of a Brexit receded further. With voting set to start on Thursday, stocks are moving in lockstep with the British pound. The FTSE 100 reached 6300 for the first time in three weeks whilst European stocks extended into a five-day rally.
Markets seem content to trot higher, with the pre-referendum volatility out of their system. The confidence displayed in financial markets is at odds with the uncertainty portrayed by opinion polls. With only a day to go, investors are using every available bit of information at their disposal. Large investment houses are reportedly carrying out their own private polls.
Markets don’t appear to be putting too much stock in the “referendum weather theory”. The rainy forecast for Thursday theoretically favours ‘Leave.’ Leave voters are thought to be more determined so more likely to brave bad weather and trudge out to the polling booth.
Bookmaker’s odds were a better predictor of the general election and seem to be driving market sentiment more than any other factor. ‘Remain’ is receiving the biggest amount of betting money, which has skewed the odds to suggest a 70-80% chance the UK will vote to stay. However ‘Leave’ is receiving many more bets. Markets appear to be taking the view that the big betting money is the smart money. An alternative viewpoint is that the referendum is a popular vote, so the number of betters should be a better guide of the outcome.
The sharp readjustment out of safe havens in favour of risky assets including the British pound in the last few days means markets may be underestimating the fallout from a Brexit. Even if betting and financial markets are proven correct and the UK votes against Brexit, the potential for political fallout in the aftermath is a downside risk.
Vested interests continue to put forward opinions on whether the UK should remain in or leave the EU in the hope of swaying undecided voters. Signatures from more than 1,280 executives makes clear the opinion of big business that the UK should remain in the EU. However the position of big business has been known for a long time, and has actually played well as an anti-establishment vote for the Leave campaign. The support of big business might sway some undecided employees but the under-reaction in markets shows it is not a game-changer at this late stage.
Retail shares were under pressure on Wednesday with shares of Debenhams (LON:DEB) and Swedish fashion chain H&M both lower. Debenhams reported a drop in second quarter sales whilst H&M announced a fall in Q2 pre-tax profits. The firms blamed the cold spring weather for the disappointment, a factor that didn’t appear to deter shoppers at rival Zara, owned by Inditex (MC:ITX).
US
US stocks opened higher on Wednesday amidst generally improved global market sentiment ahead of the EU referendum. Dovish talk from the Fed’s Yellen at her semi-annual; testimony to lawmakers has gone someway to soothe tense US investors worried about the possible impact of a Brexit on the US economy.
Shares of Tesla (NASDAQ:TSLA) sunk by over 7% after the electric car maker announced a poorly-received offer to buy solar energy company Solar City. The deal would dilute existing shareholders, worsen cash flows and add to Tesla’s debt burden; all threats to the company’s long term survival as it attempts rapid expansion into the mass car market.
FX
The British pound continued its good run of form, though came just short of making a fresh five-month high.
The US dollar was mostly lower despite data showing existing home sales touch 9-year high, rising 4.5% year-over-year.
Commodities
The price of oil dropped after a smaller than expected draw in US weekly inventories whilst gold fell slightly to its lowest in nine days.
DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) 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 CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.