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Sterling hits 2016 high, stocks climb as UK votes on Brexit

Thursday, June 23, 2016 - 19:49
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Sterling hit a 2016 high and world stocks climbed for a fifth day running on Thursday, as British voters headed to the polls for a crucial vote on their European Union membership.

[LONDON] Sterling hit a 2016 high and world stocks climbed for a fifth day running on Thursday, as British voters headed to the polls for a crucial vote on their European Union membership.

Financial markets have been wracked for months by worries about what a potential Brexit would mean for Europe's stability but the latest opinion polls showing the "Remain" camp holding a small lead have provided some comfort.

The pound, which has been the lightning rod of Brexit opinion throughout the six-month campaign, was up 0.3 per cent at US$1.4765 in early European trading having risen to its 2016 high of US$1.4847 overnight.

In the equity markets, London's FTSE was up 0.6 per cent and neck and neck with German's DAX at the top of European leader board, both of which helped push MSCI's 46-country All World index higher.

"You look at the markets and they expecting a remain win, cable (sterling/dollar) at above US$1.48 at one point this morning tells you it all," said Societe Generale FX strategist Alvin Tan.

With the polls still incredibly tight and having proved unreliable in last year's UK election, caution remained however.

Share trading across Europe was just a third of its normal level and two-thirds lower than average on the UK's FTSE Reuters data showed.

Away from the Brexit debate, Norway's crown jumped to a 10-day high as its central bank kept interest rates steady.

Traders were also digesting disappointing June euro zone PMI data as a surprising bounce in manufacturing activity couldn't offset a marked slowdown in service industry growth.

That came ahead of the results of the first of the European Central Bank's revamped long-term loan offers. It is now effectively paying banks to lend the cash they take to the eurozone's firms and consumers.

Wall Street was expected to reopen around 0.5 per cent higher later. Overnight MSCI's broadest index of Asia-Pacific shares outside Japan ended up 0.3 per cent with Tokyo's Nikkei nearly 1 per cent higher.

"Most people at this point expect a rise in the market" on expectations the vote will favour Britain staying in the EU, said Isao Kubo, an equity strategist at Nissay Asset Management. "But you never know, and it will be clear by tomorrow so you don't want to take new positions now."

The Brexit vote nerves kept safe-haven government bonds firm with 10-year German and Japanese bonds yielding 0.05 per cent and 0.13 per cent respectively compared to 1.70 per cent for US Treasuries.

Spot gold hit a two-week low of US$1,260.36 an ounce though and the main market 'fear-gauge' the VIX volatility index saw its biggest drop in a month.

Investors were heading to the sidelines ahead of the referendum as a closely fought vote meant any large positions taken before the outcome was vulnerable to being stopped out. A Bank of America Merrill Lynch fund manager poll last week found investors' cash levels at their highest since November 2001.

Some investors such as George Soros expect the value of the British pound to decline by as much as 15 per cent from current levels in the event of a British exit from the EU.

The demand for the perceived safe-haven yen remained broadly intact with the dollar adding just 0.2 per cent to 104.63 yen , while the euro gained 0.6 per cent to 118.67 yen .

The euro rose 0.4 per cent to US$1.1334, while the dollar index, which tracks the greenback against a basket of six rival currencies, slipped 0.25 per cent to 93.479.

"It will be hard for the market to move until the poll results are released. The pound obviously will take centre stage. But other European currencies and particularly dollar/yen also bear watching as the pair will reflect swings in risk sentiment," said Shin Kadota, chief Japan FX strategist at Barclays in Tokyo.

Before the vote, exchanges and market regulators moved in to tighten risk management systems. Singapore's stock exchange said it has raised the amount of cash firms must pledge to cover trading positions while central banks stood by to pump in emergency cash.

REUTERS