The good thing about the Brexit referendum is it’s this week. That rules out the painful prospect that we’ll have to endure the type of summer we suffered through last year when there was a Greece headline every five minutes on market days and every 10 minutes on weekends. Sure, there’s some event risk here, but we’ll know one way or another by the end of the week.
As we mentioned earlier today, BofAML speculates that a “leave” vote would lead to a 10% selloff in European equities and that, in turn, would mean a 6-7% drawdown in the US.
As for rates, well it’s pretty simple. Long US paper if you’re betting on a “leave”, short US paper if you’re betting on a “remain”:
(Table: Credit Suisse)
Recall also, that Deutsche Bank suggests buying into any sell-off in USTs that may accompany a “remain” outcome. For those who missed it, here’s the quote:
“It is tempting to consider the recent correlations and suggests that on Remain 10s might retrace to over 1.75 and on a ‘Leave’ they might rally through 1.35. However the reality is that the uncertainties around the vote’s implications are as much symptomatic of the underlying challenges facing the global economy as anything else. A Remain doesn’t forever inhibit lower yields – and therefore would be a good buying opportunity.”
Back to stocks. You might be wondering, given BofAML’s suggestion that the US could see a rather steep selloff in an adverse scenario, which sectors are most exposed. Thankfully, FactSet has you covered. Here’s the breakdown (poor energy just can’t catch a break):
“According to FactSet Market Aggregates and FactSet Geographic Revenue Exposure data (based on the most recently reported fiscal year data for each company in the index), the aggregate revenue exposure of the S&P 500 to the United Kingdom is 2.9%. This is the third highest country-level revenue exposure for the index, trailing only the United States (68.8%) and China (4.9%).”
“At the sector level, the Energy (6.4%), Information Technology (4.0%), and Materials (3.7%) sectors have the highest revenue exposures to the United Kingdom.”
And taking a more granular look, here’s which individual companies have the most exposure:
As FactSet goes on to note, the S&P companies with the most exposure to the UK have risen far more than than the index’s other constituents since the date of the referendum was announced. In other words: it’s a really bad setup for those companies in the event a black swan does indeed land across the pond.
So that’s rates and stocks. What about commodities? Well, clearly any meaningful macro shock is going to be bearish for the space. Citi looked at commodity performance during four previous “major risk-off events” and as you might expect, vol spikes and returns suffer:
(Charts: Citi)
Finally, let’s look at gold. Clearly a decisive “leave” vote would lead to further gains on safe haven flows but be cautious, the longs are already out in force:
(Chart: Deutsche Bank)
Trade accordingly.
