What Brexit?

International markets continued to unwind Brexit risk premium overnight.

 The extent to which Brexit risk premium has now been removed suggests that markets are pricing an outcome where a “leave” vote  has a much smaller market impact than has often been assumed.  The betting market continues to indicate that the chances of a leave vote are declining. However, this does not by itself justify removing Brexit risk premium. Even a tail risk of large market moves on a leave vote warrant caution. Recent confidence suggests that markets are starting to look through this.

Risk on moves over night included stronger European stock markets and a sell-off in gold. Australian bond yields have also risen again this morning.

However, other markets are showing signs of losing momentum. While US stock indices finished higher last night, they traded inside Monday’s range. This suggests upside momentum is faltering.

Despite the confidence on display in recent days, it would be logical for markets to begin losing momentum and volume while they wait on the outcome of the Brexit vote on Friday, Australian time. Short term traders cannot be blind to the risks that despite recent confidence, high volatility and short term illiquidity, remain a possibility as the results of the Brexit vote unfold.

It would not surprise to see a couple of days of relatively quiet trading on the ASX leading into the Brexit vote.

Market reaction to statements by Central Bankers was also in the mix with Brexit, determining market pricing last night. Despite Dr Yellen’s comments being widely taken as nudging the Fed towards a more cautious stance, Mr. Draghi’s comments appear to have had the greater impact. His reminder that further ECB stimulus is possible saw the Euro weaken against $US last night trumping Yellen’s dovish stance.