Brexit: Market remains very much driven by the developments in the UK – RBC CM

Research Team at RBC Capital Markets, suggests that in the short term, the market remains very much driven by the developments in the UK – or to be more precise, the polls on the outcome of the UK referendum due on Thursday.

Key Quotes

“The odds as implied in the betting market have retraced substantially again which has caused all sorts of markets to correct as well: equity markets rebounded, credit spreads re-tightened, the USD underperformed while GBP outperformed, gold was under pressure, etc. Most of these moves have been well documented.

We would like to highlight one move that has been less well flagged: the drop in inflation expectations that happened over the last couple of weeks – and the underwhelming rebound that occurred yesterday as a response to the poll swing. This seemed understandable as the risk of Brexit also implied the risk of dis-inflation and recession in the euro area.

We thus caution against simply extrapolating the move post the poll swing too much into the future – there might be more economic weakness in store regardless.

We would thus advise against shorts in UST, Gilt or Bund futures apart from very short dated positions. We suggest that any further tactical pull-back in Bund and BUXL ASW spreads should be used to express structural widening trades as the ECB QE increases the scarcity premium.”