BofAML: Informe Liquid Insight: Brexit – cuando el polvo se asiente

Redacción - Lunes, 27 de Junio

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 Liquid Insight: Brexit – when the dust settles
•   The UK has decided to leave the EU, in spite of opinion polls suggesting a late swing to Remain
•   We think that the UK economy will be the main victim, but the shock for the euro area and global economy will be significant
•   We look for further GBP losses and rates to open sharply lower, with peripheral spreads wider

By Ralf Preusser, Gilles Moec, Mark Capleton, Kamal Sharma

The UK has voted to Leave the European Union

The vote on Britain's continued membership of the EU has dominated the global news flow. The votes have been counted and, in spite of opinion polls suggesting a late swing to Remain, the UK has decided to leave the EU. We think the crystallization of a major tail risk for markets is likely to herald a period of volatility as investors digest the full implications of Brexit.

Economics: when the dust settles… it won't be pretty

Once the dust of the knee-jerk market reaction settles, we think that the UK's economy will clearly be the main victim, but also that the shock for the Euro area and the global economy is likely to be significant. Policy responses will be needed beyond the 'first-aid' remedy market disruption normally requires.

FX: GBP sinks

GBP has fallen sharply across the board following the vote to Leave with losses concentrated versus USD, JPY and CHF. The move has been particularly strong given the recent rise in optimism that the Remain vote would prevail, thus propelling GBP higher. Further GBP losses are likely over the near-term and a move towards 1.30 in GBP/USD cannot be ruled out. We would, however note that sharp sell-offs in GBP have historically proved short-lived. For now, this may not be the time to 'catch a falling knife'.

Rates: down the rabbit hole

Gilts are likely to rally on today's open in response to the referendum result. However we do not see this lasting for long over the coming weeks, seeing bearish repercussions ultimately dominating. In Europe we see Bunds rallying to -20 to -25bp and see Bund-BTP widening beyond 170bp.

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