begin quote from:
Looming 'Brexit' Vote Rattles Global Markets
| Wall Street Journal | - |
The
U.K.'s pending vote on European Union membership rattled global markets
on Monday, sending stocks from Europe to Japan tumbling while pushing
the yen and government bond prices to multiyear highs in a flight to
safety.
Looming ‘Brexit’ Vote Rattles Global Markets
Volatility rises across markets as polls show momentum growing in favor of Britain leaving the EU
ENLARGE
The U.K.’s pending referendum on membership in the European Union rattled markets world-wide on Monday.
Photo:
Jason Alden/Bloomberg News
Polls suggest that momentum is growing for a vote on June 23 for Britain to leave the EU, spurring concerns about a prolonged stretch of uncertainty that could damage economic growth and trigger losses in financial markets.
While Monday’s selloff spread around the globe, Europe is especially vulnerable. Britain has been among the best performing of the major European economies in recent years, and most economists believe a vote to leave the EU, dubbed “Brexit,” would hit investment hard—and possibly deliver a shock to consumption and growth overall.
Europe’s banks, meanwhile, are struggling to shake off a yearslong crisis and remain vulnerable to financial turmoil. Italian banks, for instance, are bedeviled by bad loans and will need sustained economic improvement to dig out from underneath them.
On Monday, the Stoxx Europe 600 index dropped 1.8%, wiping out all gains since February after weekend polls showed the race could be tighter than previously expected. Shares of European banks shed nearly 3%. Banks are affected by growth prospects but also by concerns that an exit could disrupt the operations of those that use London as a hub.
A telephone poll by ICM published Monday showed 50% of respondents supporting leaving, while 45% favored staying.
“Equity-market price action makes one thing clear: the Brexit vote will be a major source of volatility,” said Nicholas Colas, chief market strategist at global brokerage Convergex.
Concerns about the impact of the referendum have helped trigger 18 consecutive weeks of outflows from European equity funds and weighed on the British pound. Data from the U.S. Commodity Futures Trading Commission show investors are placing increasingly bearish bets against sterling. In the week to June 7, asset managers increased their net short position to 76,623 contracts. That is up from 72,405 contracts a week earlier and its highest level since early April.
Advertisement
On Monday, a search for safety drove investors into the Japanese yen, which surged to its highest levels since 2013 against the euro and pound. The move erased all of the yen’s losses against the common currency since the Bank of Japan started its easing program more than three years ago.
The stronger yen, however, is bad news for Japanese policy makers, who have been trying to keep it low to juice exports. Shares in Japan sold off 3.5%.
“Investors are worried that the global stagnation scenario will come back, and the possibility of a Brexit exacerbates that,” said Khiem Do, multiasset fund manager at Baring Asset Management.
If Britain pulls out from the bloc, Mr. Do says investors will be looking to global central banks to come up with ways to shore up growth. So far, “they don’t believe central banks and governments can act fast enough to counter the worst-case scenario.”
More broadly, a Brexit could inject uncertainty into Europe’s already fragile political union, which is struggling to build consensus on economic policy and on migration.
The EU “is ultimately one of the more successful partnerships of all time—the thought of that changing is destabilizing,” said John DeClue, chief investment officer at the Private Client Reserve, U.S. Bank’s wealth-management arm.
“People would start extrapolating to what else can happen in Europe if other countries leave,” Mr. DeClue said, adding “if the vote is to leave, I think you’ll see risk assets world-wide hit pretty hard.”
The losses also spilled into the U.S. on Monday, where the S&P 500 was down 0.6% in a choppy session.
With less than two weeks to go before the referendum, S&P 500 options are starting to price in a spike in volatility around the vote, according to strategists at Goldman Sachs. Meanwhile, foreign-currency options are pricing in sharply elevated volatility one month out, at levels not seen since the global financial crisis, the bank said, noting “the epicenter of the volatility tremors is precisely in the U.K.”
The British pound fell to a two-month low against the dollar, to $1.4153, on Monday, before swinging sharply in afternoon trade.
The referendum comes at a time when skepticism towards European integration is rising across the continent, leaving investors with questions about which other countries could potentially follow the U.K. out the door. A median of just 51% surveyed across 10 EU countries have a favorable view of the EU, according to a new study by the Pew Research Center, while 70% of those surveyed said they think a U.K. exit would be bad for the bloc.
Europe’s periphery sold off harder than the U.K.’s FTSE 100 index on Monday, with Spain’s IBEX pulling back 2.2%, Italy’s FTSE MIB index down 2.9% and Greece’s Athex Composite down 3.9%. Bond yields rose in Greece, Italy, Portugal and Spain.
But some strategists say the repercussions of a Brexit could trigger a selloff well beyond the continent.
“Global stocks probably drop 5% to 10% in relatively short order if there’s a Brexit, because of the importance of the U.K. economy and potential need to begin to renegotiate trade deals and labor agreements,” said Phil Orlando, chief equity strategist at Federated Investors in New York.
For markets after a Brexit, “you think the worst, sell everything and figure out the real damage after the fact,” he added, noting his portfolio currently has its lowest equity allocation since the financial crisis.
Meanwhile, uncertainty around Britain’s future in Europe has helped boost assets around the world perceived as safe. Gold for August delivery rose 0.9% to $1,286.90 an ounce, a four-week high. The 10-year Japanese government debt hit an all-time low yield of -0.161% on Monday, according to data from Tradeweb. Yields move inversely to prices.
The yield on the 10-year U.S. Treasury note fell to 1.610%, its lowest intraday level since Feb. 11, when the S&P 500 bottomed for the year.
While the Monday’s moves were sharp, betting markets put the chances of a vote to leave at around a third—higher than it has been in past weeks. Nonetheless, “the weight of money being wagered on the outcome still implies that a Brexit would come as a big surprise and therefore cause waves in the financial markets,” said Alex Holmes at Capital Economics.
—Mike Bird, Jenny Gross and Chao Deng contributed to this article.
Write to Riva Gold at riva.gold@wsj.com 
