The world now waits for a decision that politicians and central bankers have manged to turn into one that feels like the outcome is anticipated with a heightened sense of fear and dread. Project fear may have seemed like a sound way to ensure a remain vote at the outset, but the signs are that voters are starting to be more sceptical and may be prepared to go with the risk of a future outside of the European Union. The remain camp may well reflect in the coming weeks that a campaign that focussed on the benefits of remaining in may have been more persuasive. Despite all this the likelihood however remains that come the day, the fear of the unknown will sway the decision, at least that appears to remain the view of the bookmakers.
If one wanted a real time example of how hard the European Union finds it to introduce the reforms it agrees they need. This week EU finance ministers met to try and agree a European banking union, something they have been working on for several years. The likelihood of an agreement remains small, partially as Germany fears an agreement would leave them disproportionally exposed to weaker lenders. The German economy has benefited from the existence of the euro, so one would suggest they have to accept the rough with the smooth.
To joyfully change the subject from Brexit, central bankers were once again in focus this week as the Federal Reserve left rates unchanged, as expected. The Chair of the committee did not rule out the possibility of raising rates further in the coming months, however six officials now see only one further move this year, up from one in the previous month. Markets are once again likely to jockey between emotions post the June meeting. On the one hand lower rates for longer is good news, but on the other this is a consequence of lower economic growth expectations. The Bank of Japan likewise kept its monetary policy unchanged.
All this central bank activity initially led to a selloff in the US dollar against its basket of currencies and a sharp rally in the yen. The movement in the yen is often seen by professional investors as an indication of risk appetite around the globe, a rising yen is considered an indication of risk aversion. The Bank of England was also in on the act on Thursday as the monetary policy committee once again left rates at these record lows. At the end of the day equity markets finished close to where they started them, probably unsure how to react to information overload.
The coming seven days will drag for the investment community, there is very little one can do ahead of such events. The time to act may be when the result is known. If markets sell off on an exit, could there be an overreaction and offer a buying opportunity? If the remainer’s win, do we get a relief rally that may not last as investors go back to worrying about the macro picture? This is the moment active managers will earn their crust.