Easing 'Brexit' fears stoke global stock rally
Stocks jumped Monday on Wall Street, building on a massive rally that began abroad, as investors reacted to fresh polls that show the "Remain" camp is gaining momentum in the "Brexit" vote, a shift in sentiment that boosts odds and raised hopes that Britain will stay in the European Union.
The Dow Jones industrial average, which had been up 271 points early, closed up 130 points, or 0.7%, at 17,805. The broader Standard & Poor's 500 stock index gained 0.6% and the Nasdaq composite added 0.8%.
The new polls have boosted investment sentiment, which is shifting away from the risk aversion that marked last week's trading, when investors fearing a UK vote this Thursday to leave the EU sold assets that would be hurt most by the uncertainty and economic downside of a Brexit, such as stocks, commodities, and the British pound and banks.
'Brexit' vote catches Wall Street at a bad time
But fresh poll results released this weekend that show voters that want to stay in the EU are gaining momentum and edging into the lead versus the "Leave" camp has raised hopes among investors that a Brexit is less likely. Two polls conducted for the Mail on Sunday said 45% of the respondents wanted to stay in the 28-member EU, and 42% wanted to leave. A Sunday Times survey conducted Thursday and Friday said 44% wanted to remain, and 43% wanted to leave.
"Brexit momentum is turning to 'stay' in the final days of the campaign," and that is prompting investors to reverse the bearish bets they had put in place last week when risks of a Brexit were higher, Daniel Clifton, an analyst at Strategas Research Partners who specializes in politics and policy, told clients.
Markets are rallying on the hopes that a Brexit won't happen. In Europe, the FTSE 100 index in London soared 3.0%, wiping out its 1.5% drop from last week. The British pound, which has been getting hammered recently, rallied more than 2%. Similarly, the DAX in Germany jumped 3.4% and the CAC 40 in Paris rose 3.5%. The global rally began in Japan, where the Nikkei 225 jumped 2.3%.
Still, Clifton warned that the Brexit vote is still too close too call and if traders now betting on Britain staying in the EU get surprised Thursday with a vote to leave, risk will come back into markets in a hurry. A Brexit is feared by markets as it is likely to cause a spike in uncertainty and is seen hurting the U.K. economy and other economies around the world.
"After last week’s re-pricing of a higher risk that Brexit could actually happen, many of the financial indicators we look at are reversing this morning to reflect the change in sentiment that Brexit is less likely to occur," Clifton said. "If this trend continues through the week and we get a surprise vote in the other direction on Thursday, the market will not be priced in for the change in outcome. Although the momentum has really shifted, we would note that the vote is still close and there are many undecided voters."
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The Brexit vote will likely be the main financial market event this week until the winner of Thursday's vote is revealed, Gina Martin Adams, equity strategist at Wells Fargo Securities, notes.
"Stocks are likely to remain volatile as the 'Brexit' vote takes place this week," Adams says. "The potential damage to risk tolerance with a 'Leave' vote
is the bigger and less quantifiable risk to stocks, particularly as such a vote will keep markets in limbo waiting for a UK government response to the vote.
Conversely, a relief rally from a 'Stay' vote should help U.S. cyclical stocks (or those that benefit from a stronger economy) play a bit of catch up to defensive (stocks).
