UK ‘Remain’ Vote Would Fuel Huge Second Half Rally In Stocks, Yields

By Bryan Rich 

June 20, 2016, 2:45pm EST

On Friday we looked at four key market charts that suggested the worst of the Brexit storm may be behind us.

As of Friday afternoon, the bookmakers had the odds of the UK staying in the Eurozone at 64%, versus 36% leaving.  And as we looked across the prices of gold, oil and stocks, all were suggesting, at least technically, that the peak of fear, regarding a Brexit, had passed.

Gold was rising sharply early last week.  Oil began to slide. These are two very important barometers of global risk appetite, and those moves were clearly demonstrating fear and uncertainty in markets.

But on Thursday, gold put in a key reversal signal. So did oil, on Friday.  Those reversals continued today.  Additionally, a very key bond market in Germany (the German 10 year bund yield), which traded into negative yield territory at one point last week, has been clawing back into positive territory since Friday (trading above 5 basis points today – positive 5 basis points).

Why?  Because of this chart…

1aa odsmaker

Above is an update of the bookmaker odds on a Brexit.  The chances of a leave have now dropped from 44% to 25%, since Thursday.

That’s why global markets are aggressively taking back the hedging and selling from last week.

The UK vote is this Thursday.  We’ve said months ago, that despite the speculation of a UK exit, it was not going to happen, given where the oddsmakers were pricing the risk (at about 70/30 in favor of staying for much of the way), and given the scale of the “fear of the unknown” in the voter’s eyes.  Adding to that, we expected that the warnings from big public figures would come in hot and heavy as the date approached.  Type in the words “Brexit” and “warning” into Google and you get almost 7 million results.

Already, everyone has weighed in with draconian warnings in an attempt to influence the decision: from the UK Prime Minister, the head of the Bank of England, the head of the IMF, to the ECB, to the Fed and the U.S. President.  Now UK employers have been latest, directly writing their employees to warn of the business damage from a ‘leave’ vote.

If the Brexit risk continues to abate, and the referendum comes and goes on Thursday, with a ‘stay’ vote, that should clear the way for broad global stock market rallies and a sharp bounce back in yields, as the focus will quickly turn to a July Fed rate hike.

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