Article / 23 June 2016 at 12:07 GMT

Mid-session Europe: A day of reckoning

Saxo Markets


Foreign exchange

Britain's day of European reckoning is finally upon us and markets appear to be pricing in a Remain vote on the back of the latest polling data.

This tentative confidence has drawn equities higher, with sterling also posting strong gains north of the 1.49 handle. Conversely, the sentiment shift has placed German bunds on the defensive, as well as the safe-haven Japanese yen.

Volatilities are trading lower as well, and at this point it seems as if markets are prepared for anything save a surprise Leave vote from Britain.


  • US Initial Jobless Claims (270k expected, 1230 GMT)
  • US Jun Markit Manufacturing (50.9 exp., 1345 GMT)
  • US New Home Sales (560k exp., 1400 GMT)

Forex developments

EURUSD: We are seeing strong bullish behaviour; liquidity remains very limited and there is a heavy resistance at 1.14 due to the concentration of stops and limit orders in the proximity of this key level. Dealers indicate that the majority of orders are a few pips above theis point.

USDJPY: Unlike the EU pairs, JPY looks weaker today, not much to say except that liquidity is equally bad and even normal tickets have large price footprint.

GBP: Expectations of a Remain vote push the pair higher, even though there are no reliable sources of the information about poll dynamics. Dealers see strong delta hedging patterns as the pair goes higher.


Our rough expectations on tomorrow morning’s result:

FX Options volatilities
Vols are being sold in all majors as both polls and better companies are starting to point towards a Remain scenario. One-month GBPUSD is down from 23% to 17.5 %, so a pretty aggressive move, and spot also making new highs. Same pattern in other currencies: risk is getting bought. I expect spot to go to about 1.51 when the stay is confirmed, and we should have one-month ATM at around 10%. In the side crosses, I am surprised to see that EURCHF has not moved higher. 

Please note that we will most likely get some more secure results right after the polling stations are closed, and from an FX point of view that’s the worst time, as its more or less on the value date change. Hopefully the bigger banks, and maybe central banks, will provide some liquidity.

Fixed income

Growing confidence in a Remain vote is weighing on bunds, which have seen a clear break of the 164 handle and the 10-year yield jump to 0.10%.

The reaction in corporate bonds is somewhat more subdued so far, reflecting the already elevated price levels in this segment. However, ITRAX XOVER so far manages a five basis point contraction. Given the reaction so far, the upside in risk (and downside for bunds) is further limited if indeed we see a Remain vote.



European equity markets opened modestly higher before pushing onto highs following a new poll in favour of the Remain campaign. The Euro Stoxx 600 is up 1.8% on good volume with telecoms and banks outperforming. Consumer staples and Healthcare are underperforming, although still positive on the day.
Tesco reported upbeat Q1 like-for-like sales beating estimates. The firm spoke of challenging markets with sustained deflation; shares trade up 2.25%. 
DS Smith is up 7% after reporting full-year earnings ahead of expectations and have seen a positive start to the current year. 
Ocado is up just over 6% after positive notes from Morgan Stanley and Goldman Sachs and we are seeing reports of a short squeeze.

Brexit data

Betting odds: BETFAIR's latest shows an 86% chance of UK remaining in the EU.
 As polling stations close at 2200 BST, YOUGOV, Quriously, and TNS are expected to release the last of their polls. Prior experience from the Scottish referendum shows this may carry little weight, however we expect market to become volatile around this point. The first to release their results is Sunderland in the North of England, expected around 0030 BST. A Remain vote here is key and likely to set the mood, while a Leave result means the cards are very much on the table and could still go either way.
  As The Guardian wrote, “Expect Leave to have a lead of six points if the national vote is tied. Sunderland will be followed by Wandsworth and the City of London, most likely reporting huge leads for Remain. A slow trickle of results will keep the broadcasters occupied. Newcastle and Hartlepool will illustrate the difference between big cities and towns. Remain will hope to have a double-digit lead in Newcastle, but will rightly fear a big loss in Hartlepool.”

The next big waves, as reported by the Guardian and Citi:
  • 0200 BST: With 22 councils expected to declare at or around this time. Worth keeping an eye on Wrexham, one of the more Eurosceptic parts of Wales, which would be close if the national result is close. 
  • 0230 BST: Castle Point in Essex – one of the most Eurosceptic authorities in the country, and an area in which Ukip has often done well – declares around this time. Perhaps more useful as a signpost are the two Welsh declarations expected about now – Swansea and Caerphilly. Caerphilly, in particular, is likely to be finely balanced between Leave and Remain.
  • 0300 BST: By this point, we’ll be roughly two-fifths of the way there. A key area to focus on is City of Lancaster, which will probably vote the same way as the rest of the UK. 
  • 0330 BST: Edinburgh reports along with Aberdeen, Dumfries and a number of other Scottish local authorities. Edinburgh is tipped by Ladbrokes to have the highest vote in favour of Remain, so the outcome isn’t in doubt, but turnout might be important. 
  • 0400 BST: The motherlode – 88 areas are expected to report at around this time. It may be at this point that broadcasters start considering whether to make a projection. 
  • 0500 BST: By now roughly nine out of 10 areas should have reported. The remainder are mostly rural areas which lean towards Leave, sometimes quite heavily. 
  • 0600 BST: If no projections are forthcoming by this point, the referendum may be achingly close. Sefton, expected to report about now, is one of a number of Labour-leaning areas in Merseyside that might disappoint the Labour party by very narrowly voting to leave. 
  • 0700 BST: The last batch of areas to report. Most of these favor Leave, Arun in West Sussex and Waveney in Suffolk particularly so. If the result is still not known by this stage, it is almost certain that some constituent parts of the UK have voted to leave the EU while others have voted to remain, opening up a constitutional crisis lasting far beyond Friday morning.

For more research and analysis of the Brexit vote, click here.

Read more

Mid-session Europe is part of TradingFloor's stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.

Whitby Abbey, England Today's the day. Photo: iStock

— Edited by Michael McKenna and Clare MacCarthy

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