REPORT
By Gökhan Kurtaran
London letter for week beginning June 6

Making crystal ball predictions for U.K. 

Bankers, investors, even mid income savers are doing more than just counting the days left until the historic referendum of the EU referendum. High street banks are gearing up preparations for a post Brexit Britain, training staff on how to reassure confused customers who may enquire about subjects from mortgage costs to exchanging foreign currency. As the question of whether Cameron will be toppled following the referendum could not be submitted to the Conservatives, financial analysts and professionals are trying to come up with possible contingency plans. However, they are not the only ones who are readying for the worst situation ahead of the referendum.

European Union officials and diplomats launched a round of confidential discussions last week in Brussels to prepare a coordinated response to a possible British vote to leave the bloc next month, according to a recent Reuter’s story.

One way or another, Europe’s leaders will have to come up with an alternative plan if voters decide to leave the bloc.

As the polls were immensely wrong about the general elections in May and the Scottish referendum, hedge funds and investment banks have commissioned private exit polls in an attempt to profit from the result of the U.K.’s referendum on EU membership next month.  According to recent news stories, early indications of the likely result in the referendum will be indirectly visible from foreign exchange and sterling derivative markets before the polls close. Therefore, the sizable cost of running private exit polls may well pay for itself.

A most recent ITV poll shows that the Brexit camp is ahead 45 percent to 41 percent, while the TNS market research group claims 43 percent to 41 percent. The pound slumped to a three-week low after polls showed more Britons favor exiting the 28 nation bloc. The pound dropped 0.9 percent to $1.4383 as of 6:54 a.m. in London on Monday after sliding to $1.4353, the lowest level since May 16.

Recent data for the U.K. does not indicate strong growth expectations for the economy. Last week the Markit/CIPS Purchasing Managers' Index (PMI) for the sector rose to 53.5 last month from 52.3 in April. A figure above 50 indicates expansion. According to Markit, more than a third of firms said they had suffered from the uncertainty over the EU referendum. It added the economy was likely to grow by 0.2 percent in the second quarter of 2016. This would be a slowdown from the 0.4 percent growth recorded in the first quarter of the year.

"The PMI surveys show that the pace of economic growth remained subdued in May, as 'Brexit' worries exacerbated existing headwinds. Growth has collapsed in manufacturing and construction, leaving the economy dependent on the service sector to sustain the upturn, though even here the pace of expansion has remained frustratingly weak so far this year,” according Markit Chief Economist Chris Williamson.

There is not doubt that eyes will be on every new poll results and volatility will continue to remain over the pound in the upcoming days. The question of whether the polling firms are reflecting reality remains to be seen.

06 Jun,2016

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