Brexit in 22 Days?

A new Guardian poll reveals a 52 – 48 split among Britons in favor of leaving the EU. The alarming result represents a sharp decline in support for the Remain camp, which held a comfortable ten point lead as recently as mid-May. Commentators attribute Remain’s reversal of fortune to a combination of heated rhetoric surrounding the migrant crisis and a growing skepticism among Britons that a Brexit would negatively impact their personal finances. A recent survey by UK research group Ipsos Mori revealed that 58% percent of respondents believed their standard of living would be unaffected, while a further 9% believe it would increase “a little” and 2% believe it would increase “a lot.” Taken together, nearly 70% of respondents anticipate a neutral to positive impact of leaving the EU.

Meanwhile, the Organization for Economic Cooperation and Development (OECD) continues to sound the Brexit alarm and slashed its 2016 growth forecast for the UK from 2.1% to 1.7%. As we pointed out in our Brexit guide, the potential fallout from a Brexit includes the relocation of corporate headquarters from London to the Continent and potentially less favorable trade treaties for the UK. The OECD underscored these points and anticipates a loss of GDP growth of 0.5% in 2017 and 2018 and 1.5% in 2019. The International Monetary Fund anticipates “negative and substantial” long-term impacts of a Brexit, including a hit to the UK economy of 1% – 9%.

Financial markets continue to price in the Brexit risk, with the sterling/dollar exchange rate falling to 1.4483 on May 31st, a decline of approximately -1.72% from the beginning of the year. Additionally, the Financial Times pointed out that implied volatility on options tied to the sterling/dollar exchange rate spiked to 20 for the first time since the financial crisis of 2008. An increase in implied volatility means that investors anticipate future wide swings in the price of an asset; imagine the impact of a newly discovered fault line on the cost of homeowner’s insurance in an area that was assumed to be seismologically quiet.

How will the dispute between economists and the electorate play out? If political contests elsewhere are any guide, voters have signaled their willingness to rally behind the bull in a china shop for the promise of “big change” despite the dubious outlook for the broken china market. Regardless of how the vote turns out, the process has revealed a fault line in the European project that investors and business executives had long overlooked and paves the way for similar referenda and angst elsewhere in the EU.

June 1, 2016