Brexit: Markets braced for ‘extreme volatility’ ahead of vote

Financial markets are bracing themselves for a week of extreme volatility, potentially culminating in a major sell-off, if Britain votes to leave the EU on Thursday, according to investors.

Anxiety about the vote contributed to more than $1 trillion of value being wiped from global equities last week. Concerns over Brexit was also cited as one of the key reasons in the US Fed's decision to hold off hiking rates last week.

Sterling and bond yields ended the week on a slightly more positive note as traders speculated the killing of a pro-EU MP Jo Cox may change the balance of opinions in Britain ahead of the vote.

Opinion polls

However, this may be short- lived with opinion polls showing continued strong support for a British exit in the race that still looks too close to call.

While markets are expected to remain volatile up to the referendum, Friday, the day after the vote is likely to be the busiest trading day of the year as fund managers adjust their positions to the result of the vote.

Should the British vote to leave the EU, shares could fall sharply, but a decision to remain will not necessarily result in a big rally, because of other economic worries pertaining to the health of the global economy. "We are still stuck in the churn," said Jeff Morris, head of US Equities at Standard Life Investments in Boston.

Separately, it has emerged Britain’s share of global merger and acquisition activity has tumbled to a record low, as deal-making freezes amid the uncertainty over the referendum.

The volume of deals involving UK targets is down almost 70 per cent this year compared with the same period in 2015, with the $57.6 billion spent on transactions accounting for only 4 per cent of worldwide M&A.

German finance minister Wolfgang Schäuble said excessive global liquidity and debt were compounding market volatility as central banks reach the limits of measures to boost growth.

Nervousness

He singled out the threat of a Brexit as a one of the chief geopolitical risks. Other reasons “for the high level of nervousness and volatility in the markets” include Islamist terrorism, armed conflict in eastern

Ukraine

and an “excess of liquidity and debt”, he said.

"For many authorities, there's still a great temptation to buy time with money that one doesn't have," Mr Schäuble said at an award ceremony at the Institute for the World Economy in Kiel, Germany. "Fiscal and monetary policy measures have reached their limits," he said.

Mr Schäuble is the most prominent voice in German chancellor Angela Merkel’s government to question central bank policies. – (Additional reporting Reuters/ Bloomberg)