With the referendum on the UK’s continued membership of the European Union (EU) only a little over a week away, financial markets are experiencing a severe bout of nervous anxiety and heightened volatility.
The Bank of England (BoE) could face overwhelming pressure to slash interest rates to a new low if the UK opts to quit the EU. With polls indicating that the likely result is too close to call, investor fears are mounting that a Brexit vote could derail the recovery. Investors are now betting there is a 50% chance of an interest rate cut by the end of the year, according to recent moves in money markets. In March, the prospect of a cut was rated at about 20%.
The growing tension coincides with fresh jitters over the global economy, with investors around the world piling into low-risk government bonds. The political and economic pressures have pushed back market expectations of a UK interest rate rise by the BoE from its current 0.50% level to the middle of 2019 and a growing number of traders now expect the next move to be downwards. Economists believe that the Monetary Policy Committee (MPC) will decide at its monthly meeting this Thursday to hold interest rates at the current level, but many believe a vote to leave the EU could force the MPC’s hand next month.
The BoE could re-enter the Brexit debate this week when it releases its final decision on interest rates before the UK referendum on EU membership. The BoE is not bound by “purdah” rules restricting civil servants from publishing material relating to the vote. As such, it may continue to sound the alarm over a UK exit from the EU as part of this Thursday’s announcement on the cost of borrowing. Analysts believe that BoE will have license to wade back into the EU debate if the referendum is seen to hamper attempts to hit its inflation target of 2.0%.
It appears that major international banks are preparing for a City exodus in wake of an exit vote with French lenders the latest to sound a jobs warning ahead of the EU referendum. A slew of international banks are making contingency plans to transfer thousands of workers’ jobs out of the City of London as the UK referendum on EU membership approaches. With polls tightening ahead of the June 23 vote, foreign lenders are facing the prospect that their London-based operations could lose the right to operate freely across Europe under the EU’s passporting rules.
Allied Irish Banks plc (AIB) is set to return to market with the Irish Government finalising plans to privatise the bank seven years after it was bailed out during Ireland’s economic collapse. It is understood that the Irish Government intend to offload a stake of about 25% in AIB in a stock market offering early next year in a deal that will value the lender at about €10 million (£7.9 million). The offer would mark a symbolic moment for the Irish government, which had to go cap in hand to the European Union and International Monetary Fund for a €67bn bailout in 2010 after a collapse in the property market. However the country was the first of the bailed-out EU states to repay its rescue loans, and it is now the fastest-growing economy in Europe.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||13th June 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.00||2.15||-7.0%|
|Allied Irish Banks||63||62||+1.6%||6.80||6.80||0.0%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||15.60||15.25||+2.3%|
|Aust and NZ Banking Group Ltd||84||90||-6.7%||24.92||25.09||-0.7%|
|Banco Bilbao Vizcaya Argentaria S.A.||137||129||+6.2%||5.34||5.71||-6.5%|
|Parent: Barclays plc|
|Barclays Bank plc||112||109||+2.8%||1.69||1.80||-6.1%|
|BNP Paribas S.A.||86||84||+2.4%||44.30||46.32||-4.4%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||12.80||13.08||-2.1%|
|Credit Agricole S.A.||83||80||+3.8%||8.19||8.65||-5.3%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||134||129||+3.9%||20.45||20.88||-2.1%|
|Deutsche Bank AG||178||169||+5.3%||14.04||15.00||-6.4%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||93||94||-1.1%||4.34||4.45||-2.5%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||74||72||+2.8%||10.29||10.84||-5.1%|
|Intesa Sanpaolo S.p.A.||129||124||+4.0%||2.11||2.21||-4.5%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.58||4.55||+0.7%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||93||90||+3.3%||0.67||0.70||-4.3%|
|Metro Bank plc||n/a||n/a||n/a||22.10||22.19||-0.4%|
|Nationwide Building Society||78||78||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||66||63||+4.8%||77||80||-3.8%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||121||120||+0.8%||2.14||2.37||-9.7%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||78||78||0.0%||3.86||4.05||-4.7%|
|Shawbrook Group plc||n/a||n/a||n/a||2.48||2.88||-13.9%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||154||150||+2.7%||5.16||5.27||-2.1%|
|Svenska Handelsbanken AB||65||63||+3.2%||100||103||-2.9%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3179||3302||-3.7%|
|SNR FIN ITRAX CDS 5-YEARS||97||95||+2.1%||n/a||n/a||n/a|