JPMorgan Chase & Co. (NYSE:JPM) says the euro would likely rally if the U.K. votes to break away from the European Union.
If voters in Britain decide they want to go it alone, it would trigger a 1.3% pop in the euro in trade-weighted terms, and a roughly 10% slide in the pound, JPMorgan Chase wrote in a note to clients.
JPMorgan Chase Says Economic Consequences Bad for Both
“Our judgment is that in the immediate aftermath of an exit vote, U.K. growth would be depressed,” economists David Mackie and Malcolm Barr said in their note. Also, such “developments would be negative for the rest of the EU.”
The euro area is Britain’s largest trading partner. Its exit would hit euro zone annual growth by about 0.1 percentage point, they said. And over time, “as the exchange rate effect builds,” growth could slide by 0.2 percentage point.
A strong euro generally spells trouble for European exporters. Their goods and services become more expensive overseas. As such, in the event of a “Brexit,” people in the U.K. would find euro zone goods more expensive. This could potentially slow down trade between the two regions and hit both of these economies, JPMorgan Chase added.
U.K. Prime Minister David Cameron clinched a deal over the weekend to renegotiate his country’s relationship with the European Union. British citizens will vote on June 23 to decide whether to stay in the union. Current opinion polls suggest a high risk of Brexit, with NatCen’s poll of polls pegging those voting to “remain” at 52 percent, compared to 48 percent who are likely to press for an exit.
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Fed Right in Having Second Thoughts
Separately, speaking to CNBC, Bob Michele, head of global fixed income at JPMorgan Chase & Co. (NYSE:JPM) AMC, said the U.S. Federal Reserve was right in having second thoughts about raising interest rates.
“When I read the Fed minutes, I see a central bank that is out of sync with the other central banks of the world and is second-guessing itself,” Michele noted.
In the minutes released for the January 26-27 meet, the Fed policy makers reckoned that a global slowdown could have negative fallout for the U.S. economy.
While some investors are cheering post the S&P 500 having its best week this year, Michele insists there’s trouble brewing elsewhere. He points to the recent major moves in safe haven assets like the Gold and 10-year Treasury as further evidence of the ongoing risk aversion among the vast majority of market participants.
“People who have had cash are going back into the markets and putting it to work…does that change the fundamental picture? I don’t think so,” Michele said. “Fear has replaced greed.”