FXStreet (Delhi) – Research Team at HSBC, suggests that the knee-jerk reaction to a vote to leave the EU would largely depend on how unexpected the result was and what had been priced in immediately before the referendum. Key Quotes “There is a significant risk of complacency. Polls suggest that the UK will most likely vote to remain in the EU. This suggests the risk of a sharp adjustment following a vote for 'Brexit'.” “We would expect the currency to bear the brunt of this market adjustment, with sterling falling significantly in the days following an unexpected vote to leave. This would largely reflect a rise in risk premia. As noted above, investors may wait to find out more about the post-EU arrangements before embarking on significant investment or a capital flight.” “The near-term gilt market reaction is harder to call. The period of economic uncertainty that would follow a vote to leave would probably convince the BoE to tighten policy even more slowly, which would act to hold gilt yields down. Some ratings agencies have warned that the UK's rating could be negatively impacted; however, the UK is a true sovereign that issues its own currency. Hence, we would expect the wider risk aversion trade to cause a bullish flattening of the gilt curve.” “The UK stock market will in all likelihood suffer less than either gilts or sterling as investors will be quick to realise that a large proportion of earnings come from oversees, so a weaker sterling could well benefit the FTSE 100. Mid-cap and small-cap sectors may underperform due to their exposure to the domestic economy. Asset management and banks might also be hit. Finally, the very small proportion of foreign ownership of sterling credit means that it will remain somewhat insulated. That said, EUR issues by UK companies would be more exposed.” “A Brexit would also have an impact on other EU states. The EU has been challenged by a succession of economic and political crises over recent years. If one of its largest members was to leave, the whole union could begin to unravel if it led to pressure for other countries to exit the EU and/or the euro.” “Until the date of a referendum is set, it is difficult to know how to trade the possibility of Brexit. Once the date is known, it seems likely that forward volatility curves will price in a spike in uncertainty around that date. What is less clear is whether investors will then largely ignore the referendum until close to the event, or whether speculation about the result and its implications will dominate market sentiment.” For more information, read our latest forex news.