Britain’s financial market players are becoming less and less worried about the prospect of Britain leaving the European Union — dubbed a Brexit — as they are increasingly pricing out Brexit risks.
According to a new report on the British economy from Deutsche Bank strategist Jack Di-Lizia, market volatility has stabilised after recent polls showed that the remain camp is pulling away.
Financial players now generally believe that remaining in the EU is a far more likely outcome on June 23, soothing fears about what a post-EU Britain might mean for the finance industry.
Following interventions in the debate from the likes of the IMF, US President Barack Obama, and the Bank of England, there’s an increasing consensus that Britain will stick with the status quo come June. This week, Matt Singh, the polling analyst who predicted a Tory majority at last year’s general election — the only person to do so — said that there is less than a 20% chance of Brexit.
That consensus, Deutsche Bank says, is driving growing strength in the markets.
Here is what Di Lizia has to say (emphasis ours):
The upcoming EU referendum continues to represent a significant driver of risk dynamics. However, with the referendum now less than 5 weeks away the market has shown signs of increasingly pricing out the likelihood of a Brexit across a range of financial market variables. Over the past week, a shift in the latest opinion polls towards a stronger lead for remain together with bookmaker’s implied probabilities underlining a clear lead for “Bremain” has helped drive more hawkish front end pricing, a tightening in basis markets and an appreciation in sterling.
From next Friday (27th May) the pre-referendum “purdah” period begins which will restrict the ability for those connected to government to campaign for either outcome. As a result, some of the noise surrounding the current campaign should be expected to die down, which may help the market consolidate around current probabilities as we approach the 23rd June. However, given the speed of this upward revision in the market’s probability of a “Bremain,” the risk remains for some retracement in the polls, which would become increasingly significantly as the vote gets closer.
Here are the charts Deutsche argues have helped the market start to price out Brexit:
Deutsche Bank pointed to increased expectations going forward across a variety of asset classes, including the pound, sovereign credit, and equities:
Ultimately, the signal to noise ratio from these polls remains poor while a wide spread exists between telephone and online polls. Nevertheless, these recent moves have led the market to revise lower the expected Brexit probability across a range of variables, repricing expectations of easing at the UK front end, strengthening sterling and driving UK basis and sovereign CDS spreads to retrace from their wides.
This isn’t the first time that a seemingly decreased likelihood of Brexit has helped drive strength in the UK’s markets. Earlier in May, Business Insider reported that currency traders in the UK were getting less and less worried about Brexit actually occurring, which helped the pound rebound strongly from multi-year lows early in 2016.
Deutsche Bank added that the recent strengthening in the pound, which has seen it gain more than 5% since the lows seen in February, has been strongly tied to Brexit polling — if polls favour remain, then sterling will move higher, and vice versa.
Here is the chart:
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.