@Atilla
Traders would be wise to start to pay greater focus to the European banking sector, where both investment and sub-investment grade credit default swaps (CDS) are once again on the move higher and worryingly eyeing January highs. Bond yield spreads between
Southern European countries and German debt are widening and this is a huge negative for European banking system. We need to remember just how exposed European banks are to their domestic bonds (given their exposure on the balance sheet), so if yields rise, the markets’ perception of the asset quality deteriorates. Names like Deutsche and Unicredit will become central to sentiment in all markets if we see a vote to ‘Brexit’ and the hugely overleveraged European banking system could be in trouble. It’s this issue above all others that would be keeping me awake as a consideration for the vote.
On the other hand, if we see a vote to
‘remain’, then these spreads will come in nicely and European markets will absolutely fly. Long Stoxx 50, short S&P 500 will be very compelling trade for traders who are happy to somewhat take the macro out of the equation, given the Stoxx50/S&P 500 ratio has run so far so fast, as we can see from the chart and the line of best fit. Everyone will be focused on FTSE and rightly GBP, but for me the most interesting dynamic will be what happens to European yield spreads and the knock-on effect to the banking system.