Brexit fears are causing investors to lose their appetite for risk

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Risk appetite is often an ephemeral thing. Hard won and easily destroyed it goes hand in hand with bouts of ebullience and fear on global financial markets.

So given that Brexit fears have caused traders and investors to head for the sidelines, it’s no real surprise that investor risk appetite – as measured by the BNZ in Wellington – has collapsed along with market prices.

Over the past four trading sessions investors have been busy booking profits on recent strong rallies in oil, stock and currency markets and heading to the safe haven of gold, bonds, and the Japanese yen.

That move in markets has been accompanied, perhaps precipitated by, this associated collapse in risk appetite. or rise in “risk aversion” as Kymberly Martin, the BNZ’s Wellington-based strategist called it this morning.

Martin wrote in her note to clients that, “our risk appetite index (scale 0-100%) has slumped to 0.36%, its lowest level since the market turmoil of February/March. The market seems unsettled by the series of polls that now show U.K voters favour the ‘Leave’ camp in next week’s referendum.”

“An environment of risk aversion prevailed [overnight]. In this backdrop, while equities have made solid losses, credit spread proxies have pushed much wider in Europe. US Treasuries remain a ‘safe haven’.”

It’s the very definition of a risk aversion trade. Add to the US Treasury strength, German Bunds – which went negative for the first time – UK and Australian 10 years making all time lows, the rally in gold and the yen, the profit-taking in oil, and the selling of the commodity bloc currencies of Australia, New Zealand and Canada and you have the complete set highlighting just how concerned traders and investors are as Britain’s EU referendum looms on the horizon.

But, it could get worse if Britain does indeed vote to leave the EU.

In a note this morning, Mike Amey, PIMCO’s MD and portfolio manager, said “we continue to assign a 40% probability to the UK voting to leave the European Union”.

That’s a view many financial market professionals continue to hold. That means even as the momentum seems to have swung to the Leave campaign, there is still a massive event risk around this vote.

That means risk appetite could get a whole lot worse. If that comes to pass, we could see a repeat of the heavy selling and high correlations across all markets that we saw earlier in 2016.

Many will be hoping to avoid this and that Britain votes to stay in the EU.

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