The pound gained over 2% against the US dollar and the euro-pound surged 1.45%, as three opinion polls out of six showed there was a shift toward the “Stay” camp. FTSE 100 stocks rallied 2% immediately after the opening bell in London. All sectors opened in the green. Financials rallied 3.60%; energy stocks traded 1.80% higher. It has been the biggest surge since February. The DAX gained past 3%.
Despite a cheerful start, enthusiasm in the pound and the UK markets could well be a flash in the pan.
The big EU referendum in the UK is on Thursday, so we are prepared for two-side volatility and choppy market conditions. The June 23rd referendum could be the final chapter of the Brexit story, or the beginning of a new era.
The GBP/USD cleared the 200-hour moving average, 1.4567, at the early hours of the trading week. Option markets have also been shaky this morning, with a sharp decline in put options maturing in three months versus call options. Short-term investors appeared in a hurry to readjust their GBP positioning to new opinion polls, nevertheless, the market remains heavily hedged against a potential Brexit. According to the pricing in the spot pound market, a Brexit event could drag the GBP/USD down to 1.30. It is certainly a risk worth being hedged. On the flip side, buyers are ready to depart for a relief rally if Britain decides to remain in the EU. We do not rule out the possibility of a post-referendum bounce to 1.50/1.55 area.
Randgold (LON:RRS) (-2.42%) and Fresnillo (LON:FRES) (-0.73%) are the only losers in London as gold prices slipped below the $1300 on a sudden and unexpected surge in global risk appetite. The $1280 level is expected to lend support to any pullbacks as a softer US dollar, the low yield environment and the surge in physical gold demand provide a favourable basis for a consolidation in the positive trend.