For months, the world’s financial markets have been sanguine– complacent, even–about the risk of the U.K. voting to leave the European Union. Not any more.
European stocks are sliding sharply for the fourth day in a row, and the pound sterling is at a two-month low against the dollar, having now lost 3% in less than a week. U.S. stock futures are also feeling the chill, with the S&P500 contract indicated to open down 0.3% and Nasdaq futures indicated 0.4% lower.
Meanwhile government bond yields, a reliable barometer of market fear, are falling to record low levels as investors engage in a panicked hunt for risk-free assets. In Tuesday morning trading in Europe, the yield on the 10-year German government bond, or Bund, Europe’s answer to the benchmark Treasury bond, fell below zero for the first time ever.
Theoretically, that means that investors are willing to pay Berlin for the privilege of lending to it for 10 years. In practice, it just reflects that many investors are accepting the likelihood of small losses if that means they can insulate themselves from bigger ones in the aftermath of the June 23 vote.
Over the last 24 hours, four separate polls put the “Leave” campaign in the lead, including telephone polls that have generally shown a comfortable lead for the “Remain” camp. Rupert Murdoch’s mass-circulation daily The Sun also came out in favor of Brexit Monday. While it may not have the power to swing national votes the way it did before the Internet age, the paper has a knack of sensing which way the wind is blowing that will worry Prime Minister David Cameron and the rest of the Remain camp.
Over the last two months, everyone from IMF head Christine Lagarde and Bank of England Governor Mark Carney have warned that a vote to leave would hit financial markets, while President Barack Obama and others, supported by a stream of studies from think-tanks banks and universities, have warned about the long-term damage to the U.K.’s economy.
More worryingly, markets are now starting to price in the impact of a Leave vote on the rest of the European Union.
“A Leave vote could still have a very large impact,” the Institute for International Finance’s managing director Hung Tran said in a note Monday. He argued that it would lead to a long period of uncertainty in which “Europe would be increasingly inward-looking, consumed with divisive debates about its future against the backdrop of an anti-immigration and anti-free trade backlash.”
Such developments, Tran said, would likely push the E.U. into a vicious circle.
” The risk is quite high that the quality of policymaking would be poor, keeping the current sluggish growth trend in place for some time, thus alienating even more citizens.”