EU referendum: Stock markets and currencies poised for unprecedented volatility before Brexit vote
Financial markets are bracing themselves for one of the most volatile weeks of trading in living memory ahead of the EU referendum.
Analysts said this week could unleash “chaos” on the stock markets, with volatility already sky-high and indexes across the world bouncing up and down on the slightest whiff of referendum news.
Sterling, meanwhile, is expected to suffer unprecedented daily swings as the referendum campaign draws to a close.
“The atmosphere in the run-up to the referendum is reaching fever pitch,” said analyst Jasper Lawler of CMC Markets.
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.
Pound Sterling exchange rates against the US dollar and the euro since David Cameron announced the date for the referendum.
Ranko Berich, head of analysis at foreign exchange firm Monex, said market data “supports the idea that this event could cause chaos”.
Lukman Otunuga of FXTM added: “Sterling volatility has hit unimaginable levels.”
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.
“Global markets are on high alert … Uncertainty continues to heighten and has triggered a wave of risk aversion,” said FXTM’s Lukman Otunuga.
The FTSE 100 index since David Cameron announced the referendum date on 20 February
Traders said they expected to see relatively low volumes in the first few days of the week as most big funds have already bedded down their positions ahead of the vote. This lack of liquidity could accentuate the gyrations on both the stock markets and in currencies.
“I suspect volumes could get quieter as we move into ‘wait and see’ mode,” said Russ Mould, investment director at AJ Bell. A survey of institutional investors by the 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.
Read more: We asked 12 experts to predict what the FTSE 100 and sterling will do the day before the vote
The Vix – often dubbed the "fear index" – which tracks volatility on the FTSE 100 has also leapt from 20 to 34.4 over the last week, just 2.6 points off its highest level in the last year.
The fallout is unlikely to be limited to the UK. Last week, yields on German government debt hit their lowest ever level, turning negative on 10-year bunds.
Trading volumes on the FTSE 100 since David Cameron announced the date of the EU referendum. Numbers across the bottom mark the number of trading days (a total of 85) between the announcement and the vote.
“The greatest volatility could be seen … in Europe,” said AJ Bell’s 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.”
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 fifteen per cent ahead.
“The reports of private exit polls being commissioned show just how much interest is being paid to the referendum,” Moxex’s Berich said, adding: “As money is committed on the day, volatility is likely to go through the roof.”