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Brexit: Highly anticipated UK referendum is underway – BBH

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By Sandeep Kanihama

Research Team at BBH, suggests that the UK’s referendum is underway and the capital markets are continuing the move that began last week with the murder of UK MP Cox.

Key Quotes

“The tragedy seemed to mark a shift in investor sentiment. Sterling bottomed on June 17 just ahead of $1.40. Earlier today in Asia, after more polls showed a move toward remain, sterling rallied to almost $1.4845, its highest level since last December.

There are a couple of points to make about the UK referendum. First, the betting and event markets have moved well ahead of the polls. Nearly all the last phone polls show remain ahead, while most of the online surveys show leave ahead. We note that speculator in the futures markets had been adding to gross long sterling positions in the week before the market actually turned.

Under such circumstances, the market seems vulnerable to a “buy the rumor sell the fact” type of activity. The fast participants, speculators, hedge funds may take profits as the slower participants, like corporations, asset managers and the like more gradually re-build the UK exposure that had been shed.

Second, that said, it may be helpful to consider some potential chart points as mile markers of sorts. The $1.4885 area corresponds to a 50% retracement of the down move since last June’s high around $1.5930. The upper Bollinger Band that has been frayed a bit comes in near $1.4835. Above there is the 61.8% retracement near $1.5130, and the 100-day moving average is near $1.5230. Sterling has shot up so quickly; it is difficult to have much confidence in nearby support, though a break of $1.46 would signal the snapping of the momentum.

Third, the polls close at 10 pm BST, which is 5 pm EST. The first results expected to take roughly two hours to begin trickling in. Of course, all districts are not equal. Areas, for example, in which UKIP has run strong in recent elections, should be expected to vote for the exit, while the most cosmopolitan cities and university areas can be expected to favor remain. The demographic that favors Brexit appear to be lower incomes, no college degree, and older voters. A record 46.5 mln citizens have registered to vote.

Fourth, liquidity is expected to be compromised. The results will be reported during the Asian session, which is typically not the most active. While traders around the world will be watching events unfold, there is a great risk, and that will be impacting market conditions. As has been the case, but especially now, after the strong move over the past week, a vote to leave the EU will have a much greater impact than a decision to stay. Turnout is key, and incidentally, the heavy rain in southeast part of the UK. Including London is experiencing exceptionally poor weather.”

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