It’s less than two weeks until the UK population votes on the referendum to decide whether Britain remains a part of the EU or makes the decision to leave and once again sail the global seas on its own.
This event, and the potential economic and market repercussions from it, has everyone from Fed chair Janet Yellen, legendary hedge fund manager George Soros, and investment bank Goldman Sachs warning of growing uncertainty and the implications of the vote.
Overnight, global credit ratings agency Standard and Poor’s (S&P) added their voice aggressively to market fears about the potential implications for markets.
Writing in the UK Telegraph, Ambrose Evans-Pritchard reports this morning that S&P said “Britain is the world’s most vulnerable state on a key measure of short-term debt and credit markets might suddenly seize up if voters opt for Brexit.”
S&P also said it will strip Britain of its AAA rating by at least one, perhaps two notches.
Moritz Kraemer, S&P’s head of sovereign ratings, told the Telegraph that “there is no clear ‘Plan B’ in the UK and we are not going to wait until we find out what the British position actually is. We could potentially see a two-notch downgrade.”
“We are categorical about this,” he said.
What’s troubling S&P, Evans-Pritchard says, is that “the level of debt coming due over the next 12 months is 755pc of the country’s external receipts, the highest for all 131 sovereign states rated by S&P”.
That’s around 2.4 times the next two most exposed states, the USA and France.
S&P’s Kramer said, “If there is no currency and maturity mismatch, then there is no big issue. But we don’t know that for sure.”
“These sums are very large and have to be rolled over constantly. Nobody has ever hesitated in the past because it was always assumed that Britain is a safe haven and there is no risk,” he added.
Kraemer’s point that no one actually knows what will happen is the key concern that is growing among traders.
Uncertainty is poison
Earlier today, CMC Australia tweeted that the impacts on the market will be broader than just the pound and UK debt, and will affect many other asset classes.
Now only two weeks away, the Brexit vote is likely to impact trader behaviour in the broader risk markets like equities and commodities.
— CMC Markets ANZ (@CMCMarketsANZ) June 10, 2016
Capital Economics said this broader impacts depends on what happens if Britain does vote to leave.
“Above all, whether there is a significant and lasting impact on global markets will largely depend on the degree of contagion from events in the UK to the rest of Europe,” Julian Jessop wrote in the Capital Daily for June 10.
But traders and risk managers need to take action now. As I wrote in a post on Brexit and sterling yesterday at the AxiTrader Blog:
Risk managers at banks and funds all over the globe (and margin setters at brokers and on futures markets) will be tapping traders on the shoulder and increasing the volatility quotient for open positions in Sterling. That will mean smaller positions sizes for GBP and GBP related crosses and assets – likely including the FTSE. That can reduce liquidity and so serve to defeat, but reinforce, the actions of the risk managers and make GBP and UK assets more volatile.
We asked Chris Weston, chief market strategist at IG in Melbourne, what he thought about the potential impact of the vote.
Weston told Business Insider that “a vote to leave would send huge volatility through financial markets as uncertainty spreads, so on the day of 24th June (when we learn the result of the referendum) there is a possibility of strong moves in GBP, FTSE and EUR assets”.
“A vote to leave would see everyone buying JPY.”
Weston highlighted that companies, funds, and other institutions are already moving money out of UK assets.
Naturally all of this means that if Britain votes to stay in the EU there is plenty of upside in UK and global asset markets. A vote to stay may even ignite an explosion higher in the pound, FTSE and risk appetite more broadly.
But for the moment, uncertainty is all pervading in markets and just might continue to do so for the next two weeks while we await the outcome of the vote.
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