It’s the last day of campaigning before the big vote on Thursday. Traders, bankers and money managers are already pretty nervous, judging by what they have done during the past days. Whereas last week saw a strong sell-off of all sorts of assets, particularly those with a strong UK-exposure, investors bought back heavily on Monday and Tuesday. Still, billions have been taken out of UK based funds in the run-up to the referendum. Last week, the FTSE 100 shed close to 100 billion pounds within four days. Banks, particularly Barclays, are deemed to be among those most affected by a vote for Brexit.
The losses have flavoured the debate, now that the vote is imminent. For some, they are an indicator for what might await them on Friday. Although most polls no longer see Leave in the lead – and the bookies just readjusted their odds towards a vote for Remain – many decision-makers working in the financial industry fear that the early morning hours on Friday might provide them with a surprise outcome.
Should there be a vote to leave, experts forecast a sharp decline in Pound Sterling between 10 and 20 percent, a move that could also drag down the Euro. British shares as well as European shares are supposed to tank, with a mark-down in the region of around 20 percent.
With the help of extra liquidity operations, the Bank of England has already provided banks with extra cash in case. Governor Mark Carney is said to be prepared to reduce base rates further, from the longterm historic low of 0.50 percent. In addition to this, the Bank of England could increase the amount of money it spends on asset purchases (currently at 375 billion pounds) and coordinate with other central banks such as the ECB in order to limit any impact on the overall financial system. As recently as Tuesday, the Executive Board of the ECB met in order to discuss potential scenarios after the referendum on Thursday.
Thanks to a number of swap lines between for example the Bank of England and the ECB, officials seem to be confident they are well-equipped for any sort of shock. That’s also what I took away from my recent interview with Andrea Enria, the chairperson of the European Banking Authority (EBA). According to him, national and supranational regulators have made sure that British and European banks are prepared for the worst.
Banks and funds have also taken measures. Depending on whether they are hugely exposed to the potential outcome of the referendum or not, they have hedged some of their positions, sold off risky assets and set up contingency plans should there be a vote to leave.
However, there are people who say that this might not be enough. On Monday, George Soros, the famous investor who successfully bet against the Pound Sterling in 1992, warned of a potential “Black Friday” should there be a vote for Brexit. Unlike in 1992, when the UK dropped out of the Exchange Rate Mechanism, there is not much scope for a cut in interest rates, Soros argued. Assuming that the Bank of England would not embark on a similar mission like the ECB to enter negative interest rate territory, there is obviously not too much room between 0.50 percent and zero.
This is also where it’s no longer just shares and currencies that are suffering. After a Brexit vote, a decline in Pound Sterling would impact ordinary citizens relatively quickly. “Too many believe that a vote to leave will have no effect on their personal financial positions. This is wishful thinking. If Britain leaves the EU it will have at least one very clear and immediate effect that will touch every household: the value of the pound would decline precipitously. A vote to leave the EU would also have an immediate and dramatic impact on financial markets, investment, prices and jobs,” Soros said, according to the Guardian.
So will it be all shock and horror on Friday? The first results are supposed to come in around 3 AM in the morning. That might be the time when the turmoil starts, first with money markets in Asia. Thanks to my editors, I will be watching this very closely: On Friday, I will be shadowing a trader at an investment firm here in London, from around 4 or 4:30 AM onwards, and see how he reacts to the outcome of the referendum.
I guess I will be more nervous than him.