Brexit impact on UK asset markets

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25 May 2016
  • Financial markets have increasingly focused on the upcoming European Union referendum.

  • Using exogenous probabilities from polls and financial spread-betting markets, we estimate the impact of Brexit on key UK asset markets.

  • We find evidence that Brexit would likely lead to further depreciation of sterling against both the US dollar and the euro. We tentatively forecast a move towards $1.30 for sterling-dollar post Brexit.

  • Bond yields exhibit less of a ‘Brexit effect’. We demonstrate that this reflects the countervailing effects of expected lower policy rates and a reduced desire to hold UK gilts.

  • UK credit markets post clear signs of underperformance against euro area and US counterparts as the perceived risk of Brexit rises.

  • UK focused equity markets have also underperformed US stocks as fears of Brexit have grown.

  • The widespread cross-asset impact of  changing perceptions of Brexit risk suggests a marked impact on UK financial market volatility as the referendum outcome becomes known.