UK Strategy: Pricing Out Referendum Risk? – Deutsche Bank
Jack Di-Lizia, Strategist at Deutsche Bank, suggests that the upcoming
EU referendum continues to represent a significant driver of risk
“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 bookmakers’ 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) we enter the pre-referendum “purdah” period, restricting the ability of those connected to government from campaigning for either outcome. This reduction in campaign noise should help consolidate implied probabilities around current levels but the clear risk remains that polls may swing back in the final weeks to the vote.
UK data this week continued the recent theme of softness, with inflation showing signs of payback from last month’s higher print while the latest employment report showed wage growth slowing. Although referendum uncertainty was likely at play, some of the slowdown in wage growth over March may also have been a response to the introduction of the new Living Wage from April, indicating payback risks next month.
From a trade perspective the higher probability of a vote to remain should support our money market steepening bias. We maintain our Sep 16 – Mar 17 MPC dated steepener which should benefit from (a) a hawkish repricing following a vote to remain as well as (b) the Bank of England easing earlier than currently priced should the UK vote to leave. Further out the curve, we exit our long 5Y5Y UK vs. US as we head into heavier UK issuance over the next two weeks.”