Markets are betting 2–1 the UK will remain in the EU but securities will tumble if they're wrong
With only a little more than a month remaining before we learn the result of the UK's historic and potentially seismic vote, financial markets are emitting signals of the likelihood of a ‘Brexit' vote and its potential impact. While most political and economic pundits have turned to historic precedents or fundamental trade analysis to form their opinions about the impact of a ‘leave' vote, we have chosen to examine what today's currency markets can tell us about the effect of the UK voting to leave the European Union. Since such a decision would impact all financial portfolios, whether or not they are directly invested in European or UK securities, we formulated a series of market-implied stress tests to help financial professions estimate the impact of a Brexit on their own funds. Our intention is not to make an argument for or against the UK remaining in the EU, as such analyses are more than readily available elsewhere, but rather to structure a framework for understanding what type of immediate financial impact can be expected from a vote to remain and from a vote to leave.
