Brexit uncertainty bites as referendum looms

The increase in the probability of a Brexit following June’s referendum, as polls have shifted towards “Leave”, has rattled markets recently. Trade-weighted sterling has resumed its slide, while interest rate expectations have fallen further too. Indeed, markets don’t expect official interest rates to rise above current levels until 2020. This has helped to pull gilt yields down to all-time record lows, while UK equities have dipped too. In recent days, it looks as if Brexitworries have also started to contribute to jitters in global markets, with 10-year German bund yields turning negative for the first time and equities suffering worldwide. We think that a vote to Remain – still considered the more likely outcome by betting markets despite its probability falling – would see sterling rally strongly, probably to around $1.50. Bond yields would probably rise as the prospect of interest rate hikes returns to the fore. And UK equities might rally alongside global equities as sentiment improves.