UK referendum result: The big question for markets this week

Here are the key questions we at FT Markets are asking as a new week looms.

UK referendum on EU membership — Leave or Remain?

After months of polls, campaign slogans, UK voters will finally have their say on Thursday. The risk of Brexit has dominated global market sentiment of late and we can expect further swings in currencies, bonds and equities. For investors, the referendum result is a binary event, so likely to prompt a major market reaction whatever the result.

When the polls close at 10pm, traders will burn the midnight oil in London with global foreign exchange at the forefront of market reaction. While the direction of sterling looms as a major driver, traders also expect significant buying of havens, notably the Japanese yen and gold should UK voters tick the box for leaving the EU. Pressure on the euro also looks likely as a Brexit will spur doubts over other members staying in the EU.

In the event of a victory for the Remain camp, the big question is how much of a relief trade beckons for markets? For UK Gilts, any back-up in yields from near record lows on a Remain vote, may well be limited by investors searching for fixed returns in a world where more than $10tn of sovereign paper yields below zero per cent.

After the referendum, what’s the next driver of markets?

Britain has certainly punched above its weight in terms of market influence lately and once the dust settles over the referendum result, investors will seek a new defining force that guides risk appetite. Spanish elections, Greek debt negotiations loom, while the June US payroll report arrives the week after next. The latest reading of the US labour market after May’s disappointing result could well set the tone for summer.

What more can Janet Yellen say?

The Federal Reserve chair has been vocal of late and with her downbeat remarks at last week’s press conference still resonating, Ms Yellen appears before Congress this week.

Bond traders currently price less than a 50 per cent chance of the central bank raising overnight interest rates until the spring of 2017. That is why the two-year Treasury note yield has slid from a peak of 0.91 per cent last month to a recent low of 0.65 per cent. Policymakers still expect two rate increases this year, while their rate forecasts for 2017 and 2018 have been pared back. As bond traders question the credibility of official forecasts, the Fed chair will probably suggest two policy shifts remain on the table for this year.

When does the entire Swiss bond market turn negative?

We are very close. Last week, yields in the CHF80bn Swiss bond market out to 2058 traded at sub-zero rates, meaning investors pay more than they receive in interest and repayment of principal to lend to the Swiss government.

A slight rise in global bond yields on Friday pushed 30-year Swiss paper back into positive territory — but only just. That leaves just one other outstanding Swiss bond issue with a positive yield, a 2064 maturity paying a meagre 4.5 basis points. If the flight to safety continues, Switzerland could become the first country in the world to see its entire yield curve drop below zero.

What next for the Japanese Yen?

The yen stands out as the currency market’s safe haven play, appreciating to ¥103.55, its strongest level in nearly two years last week. A Brexit is seen triggering a surge in the yen’s value, particularly as the other haven currency, the swiss franc has been relatively muted as risk appetite has swung lately. Further appreciation of the yen, however will test the patience of Japan’s policymakers. One thing we do know from intervention history is that it pays for a central bank to wait for a very extended market, then hit it hard with massive F/X sales.

This article has been amended from an earlier version to reflect that the US employment report is due the week after next.