“Should I stay or should I go now? If I go there will be trouble, and if I stay it will be double.” The lyrics from this aptly named song “Should I Stay or Should I Go” released in 1982 by the English rock band The Clash might as well be the theme of the markets this week. The risk of the UK leaving the European Union has captivated the emotion of traders as we approach the referendum next week. One of our research providers noted that the term “Brexit” was the topic of a Bloomberg article 700 times this past Wednesday. Think about that. That is a Brexit related article almost every 2 minutes over a 24 hour period. Each newly released poll creates a tremor through currency, fixed income, and equity markets across the globe. The British pound has fallen back near the 1.40 per US dollar level. The ten year maturity government bond in Germany has now gone negative. Major international markets move one to three percent per day and mostly to the downside as they break through the typical correction measure (greater than 10% down from a high). While political campaigning was halted out of respect in the tragic death of M.P. Jo Cox, the topic continues to dominate the market mindset. If the previous Scottish referendum is any indicator, the frenzy is likely to grow as we approach the actual vote. Polls have the outcome too close to call, but do not underestimate the human behavioral bias to favor status quo over change when push comes to shove.
Given the uncertainty, the raft of central bank decisions showed monetary policy makers on hold. The US Federal Reserve, the Bank of Japan, the Swiss National Bank, and the Bank of England all stayed on hold. Probabilities for an interest rate increase in the US continued to fall as there is now only a 5% chance of an increase in July and about 20% in September priced into markets. The Japanese yen continued to rise (and the equity market fall) when the Bank of Japan failed to announce even more stimulus than is already in place. In the Bank of England decision, leader Mark Carney noted the economic impact already occurring to the UK economy as decisions on hiring and investment are delayed due to the uncertainty. Regardless of the outcome of the UK referendum, it should be increasingly apparent that monetary policy has its limitations. Logic would suggest that, should policy makers which to further extend stimulus, it should be in the form of coordinated fiscal policy. Of course, when it comes to politics logic can go out the window.