An optimistically cautious end to May was punctured by a surprise surge for the Leave camp in the latest UK Brexit poll. Whether this says more about what Guardian readers are thinking as they pack their bags and buggies in preparation for this summer’s festival season, or does indeed reflect a wider swing in sentiment is unclear – and will surely remain so until the result is announced. Remember how polls at the last UK general election showed that they’re not always spot on? Nonetheless, polls are seldom ignored and two markets that certainly didn’t ignore this one were cable (the GBP/USD exchange rate) and the FTSE 100.
The two are only really semi-co-dependent. The FTSE 100 contains so much international exposure as to be almost entirely US dollar sensitive, but the fact that these two markets got a big dose of volatility at the end of May and into June says much about current market sentiment: it’s cautious and it’s jumpy. Cautiously nervous? Nervously cautious? Whichever it is, it doesn’t like loud bangs!
Whoever chose June as the month in which the UK would vote on its future relationship with, let’s face it, the rest of the civilised world could not have predicted that we’d also find ourselves once more staring down the barrel of the US Fed’s proverbial interest rate cannon. And while a mere 25bp rate hike is surely nothing to be worried about, now we’re here, it’s natural to wonder what effect one will have on the other. Might the Fed hold off because of Brexit risk? After all, last September it held off because of “international headwinds”. International headwinds have been a feature of the world for, like, ever. Yet Brexit has no real precedent. On the other hand the Fed went ahead in December, right in the middle of a hideous time for stock markets, just because some jobs were added in the US economy.
The dilemma that faces policymakers right now is hardly a subtle one. June is sure to be a tumultuous month because, right in the middle of it, there’s a potentially paradigm-shifting referendum in the UK. Whatever the outcome, the potential for considerable political unrest in both the UK and Europe is very real indeed, so July may also throw up the sorts of international headwinds the FOMC loathes so much.
All that considered, June might actually present the more realistic opportunity. Will the US simply get it out of the way and adopt the brace position for what will surely follow?! Whatever happens, we can be sure that the FTSE 100 index and the GBP/USD pair will find themselves with few hiding places, if any, for the remainder of the year. It’s time to buckle up.
This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.