New downside risks from Brexit as trader's 'squeaky bums' ease off

Up almost 1.2% above 1.4480 for the first time since December, sterling was resurgent on Thursday, while the FTSE wasa trading around seven-week highs in the wake of new polls and bookmaker updates suggesting a real shift back to Remain, and an even higher probability that such a vote prevails.

"Following a cautiously optimistic 'squeaky-bum' start on still-tight opinion polls, we have moved towards markets effectively pricing in a Remain vote as a done deal," said Mike Van Dulken at Accendo Markets.

An online poll from market research firm Populus published on Twitter at midday showed support for the Remain campaign at 55%, with 45% in favour of leaving.

From a survey of 4,700 respondents from Tuesday up until midnight on Wednesday, Populus said the result was its strongest by far in favour of Remain.

This followed odds of a Remain vote in the EU referendum rising to 86% by 1100 BST from 77% overnight at Betfair, as the bookmaker revealed the implied probability of Brexit shifting from 22.7% to 17.2% in the space of a few minutes earlier.

An Ipsos Mori phone poll for the Evening Standard released around the same time found 52% support for Remain, up five percentage points, versus 48% for Leave as the pro-Brexit camp lost five points.

Van Dulken said the risk now was that the strong financial market moves on Thursday "leave little room for any relief rallies tomorrow - this also means more downside potential for any sell-off should a surprise Leave vote be delivered".

He added: "While tomorrow’s official result will decide on the UK’s future regarding the EU it will also likely serve as a confidence vote in not just David Cameron but the political pollsters we have all been watching like hawks. Could they have got it wrong again?"

FTSE could fall

UBS noted the possibility the FTSE 100 could drop 21% from current levels to below the 5,000 mark due to the risk rally of the last few days.

He estimated percentage moves in the mid-teens for UK and EU equities but materially smaller moves for the S&P 500 and emerging market equities, and said sterling may come under significant pressure, while the euro will be more stable.

In a Remain scenario, outside European and UK stocks – where a significant relief rally is likely – UBS expects much less pronounced moves across assets.

Credit Suisse, in its global equity strategy note on Wednesday, said it would cut its FTSE 100 year-end target by 6% and its Euro Stoxx 50 target by 12% in the event of a Brexit.

The Swiss bank said that in a full Brexit scenario – where Article 50 of the Treaty on European Union is invoked almost immediately – its FTSE 100 year-end target would drop to 6,200 from 6,600, while its S&P 500 target would decline to 2,000 from 2,150 and its Euro Stoxx 50 target would slip to 2,950 from 3,350.

Currency losers

One of the many brokers that expects the UK to vote to stay in the UK, Nomura suggested, as many others have done, that Japanese yen (JPY) and the Swiss franc (CHF) would be the initial losers from a win for Remain, along with the pound (GBP), while suggesting some other currencies that might gain from such a result.

"We would also expect USD/JPY to recover to 105.0 swiftly, while EUR/CHF would likely trade around 1.10," Nomura said in a note to clients.

Analysts there said they would expect Norweigan krone (NOK) and Swedish krona (SEK) will perform well and Scandi currencies to appreciate against euro (EUR) and Swiss franc.

"EUR/USD would likely initially react with EUR appreciation, but the momentum would not sustain in the medium term.

Although Nomura expects most voters to opt for remaining in the EU, it expressed caution that recent opinion polls indicate that it could be a close vote.

"If the UK instead votes to leave the EU, large market moves in the opposite direction would likely occur. We would not expect the Bank of England to deliver a knee jerk monetary policy response to this, but liquidity will be made abundantly available by policymakers in the UK and beyond to contain the shock to global risk appetite."

Analyst suggested a Brexit outcome would lift JPY and CHF, while responses by respective policy makers would be important, while EUR "might not" benefit from negative risk sentiment after a Brexit.