Hold on to your hats: Markets brace for referendum turmoil
Financial markets are braced for one of the most volatile weeks of trading since the height of the financial crisis in 2008.
As referendum campaigning resumes following its suspension after the horrific murder of MP Jo Cox last Thursday, analysts said this week could unleash “chaos” on already volatile stock markets.
Ranko Berich, head of analysis at foreign exchange firm Monex, said market data “supports the idea that this event could cause chaos”.
“The atmosphere in the run-up to the referendum is reaching fever pitch,” said analyst Jasper Lawler of CMC Markets.
Sterling is expected to suffer unprecedented daily swings in the run up to Thursday’s referendum vote.
Read more: Sterling could plummet to $1.10 after Brexit
Options markets show the pound is pitted to suffer the most violent movements of any of the world’s 40 major currencies tracked by Bloomberg, a group that includes the Russian ruble, the Kenyan shilling and the Brazilian real, this week.
“Sterling volatility has hit unimaginable levels,” said Lukman Otunuga of FXTM.
On a standalone basis, one-week volatility – a measure of how much a currency is set to move over the next seven days – is running at its highest in recorded history, twice the levels reached before the Scottish referendum or last year’s general election.
The fallout is unlikely to be limited to the UK. “Global markets are on high alert. Uncertainty continues to heighten and has triggered a wave of risk aversion,” said Otunuga.
A survey of institutional investors by Bank of America Merrill Lynch showed global equity holdings had plummeted ahead of the vote, while the weekly outflow from UK equities hit £769m, its second largest in a decade, as investors sought safe havens such as bonds.
The Vix – dubbed the “fear index”, the most commonly-cited measure of global market volatility – has leapt from 20 to 34.4 over the last week, just 2.6 points off its highest level in the last year. Last week, yields on German debt hit their lowest ever level, turning negative on 10-year bunds.
“The greatest volatility could be seen in Europe,” said AJ Bell’s investment director Russ Mould, since “a vote to Leave could raise the prospect of other votes on membership in other EU members, begging all sorts of existential questions”.
Read more: Cameron: Brexit is a "one way ticket"
He added that banking stocks across the continent were particularly vulnerable, given the UK’s big financial services sector and the unknown outlook for monetary policy in the event of Brexit. Over the last three weeks, the Eurostoxx banks index has dropped 15 per cent.
“Reports of private exit polls being commissioned show just how much interest is being paid to the vote,” Monex’s Berich said. “As money is committed on the day, volatility is likely to go through the roof.”