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Brexit: Stocks, pound rise as markets bet Britain will remain in EU

by June 23, 2016 General

Sterling climbed to a 2016 high and global stocks rallied as investors bet Britons were likely to vote to remain in the European Union.

Oil prices rose, shrugging off a smaller-than-expected draw in US crude stockpiles, and the safe-haven yen fell against the dollar as the last pre-vote opinion polls showed the “Remain” camp holding a small lead.

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Financial markets have been racked for months by worries about what Brexit, or a British exit from the European Union, would mean for Europe’s stability.

“The markets are the best judge of what is going to happen, and they are saying that Britain will remain. The key is the strong jump in the pound,” said Peter Cardillo, chief market economist at First Standard Financial in New York.

The pound jumped to a 2016 high. The pound jumped to a 2016 high.  Photo: Jason Alden

The pound, which has been the lightning rod for opinion on the EU referendum throughout the six-month campaign, was up 0.9 per cent at $US1.48 as traders cut their bets on volatility after the vote.

Wall Street rose nearly 1 per cent, with the S&P 500 approaching all-time highs. MSCI’s 46-country All World index climbed 1 per cent to hit its highest in two weeks.

The advance on Wall Street tracked European and Asian markets. London’s FTSE rose 1.23 per cent, hitting a two-month high. Germany’s DAX and France’s CAC 40 rose nearly 2 per cent. In Tokyo, the Nikkei closed up 1.1 per cent.

With the polls still tight and having proved unreliable in Britain’s general election last year, however, caution remained.

Wall Street rose nearly 1 per cent, with the S&P 500 approaching all-time highs. Wall Street rose nearly 1 per cent, with the S&P 500 approaching all-time highs. Photo: Michael Nagle

“Everybody is a bit shell-shocked at the way the market has moved so aggressively (towards Britain remaining in the EU),” said Saxo Bank’s head of FX strategy John Hardy.

“If you are stuck with a short position, you are being forced out without even knowing the result, but what this also means is that a Brexit result is now a catastrophic risk.”

Not so volatile times

Before the British vote, exchanges, market regulators and banks moved to tighten risk-management systems. Singapore’s stock exchange has raised the amount of cash companies must pledge to cover trading positions. Central banks have said they stand ready to pump in emergency cash. .

Questions remained about the direction markets will take even if the United Kingdom votes to stay in the EU, with some believing investors may take profits whatever the outcome.

“My guess is, the rally we’ve seen this week is probably ‘buy on the rumor’ and that if they do vote to remain I wouldn’t expect to see much more in the way of upside,” said Ed Keon, managing director and portfolio manager for QMA.

Safe-haven government bond prices edged lower, pushing up yields. Ten-year German bonds yielded 0.095 per cent and US Treasury yields rose to 1.735 per cent .

The bullish tilt was reflected elsewhere. The main US stock market “fear-gauge”, the VIX volatility index, dropped the most in 5 months. Safe-haven gold fell 0.4 per cent to $US1,261.21 an ounce before hitting a two-week low.

Demand also faded for another safe haven, the yen. The dollar jumped more than a full yen to 105.82 yen and the euro gained more than 2 per cent to 120.18 yen in its biggest jump since December.

The euro zone currency also climbed against the dollar, briefly breaking $US1.14 and last trading up 0.5 per cent to $US1.135. That pushed the dollar index, which tracks the US currency against six rival currencies, down 0.2 per cent..

Oil prices rose in volatile trade, with investors less worried about prospects for the global economy. Brent crude was up 35 cents, or 0.8 per cent, at $US50.23 a barrel.