Brexit Concerns Grow in UK and EU – 15th June 2016

Brexit Concerns Grow in UK and EU

The growing fear that Britain could vote to leave the EU next week and the impact that is having on financial markets is no surprise. What is surprising is the narrow ranges that are being witnessed. Oil, for example, remained within a 50-cent range during most of yesterday’s London session, an almost unheard-of phenomenon. Currency ranges were not quite as narrow but the net difference between the US Dollar at the front and the Norwegian Krone at the rear was less than 1%.

It was a fairly relaxed day for Sterling, which was microscopically firmer on average against the other dozen most actively-traded currencies with the most interesting mover being the Euro. It did not go far, losing just half a cent to the Sterling and four fifths of a US cent, but it looked as though it, too, was beginning to suffer the effect of a possible Brexit. Without doubt, the UK’s departure from the EU would be destabilising for the European Union and the single currency.

Yesterday’s data featured UK inflation which was unchanged at 0.3% while US retail sales increased by 0.5% in May, slightly more than expected. Even if British inflation had printed at 1.3% investors would not have seen the figure as pointing to higher UK interest rates. Interestingly, a “Remain” vote would ease the Bank of England’s progress towards a rate increase but a vote to “Leave” could easily force it to cut.

The two main non-events today will be the UK employment data this morning and the Federal Open Market Committee’s rate announcement at dinner time. The UK’s jobs numbers would have to be well out of line to have any effect on Sterling and there is zero expectation of a US rate rise today.

Given the way global markets are reacting to the Brexit threat the Fed is most unlikely to risk making investors even more edgy than they are already. An unexpected rate increase today would do exactly that.

Further down the list of things that won’t make any difference is the EU balance of trade, US producer prices and the New York Fed’s manufacturing index. That does not necessarily apply to tonight’s NZ first quarter growth data or the Australian employment figures.