Stocks, pound climb as Britons head to the polls

AP News
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Posted: Jun 23, 2016 1:45 PM

NEW YORK (AP) — Investors have a lot riding on Thursday's referendum on British membership in the European Union. Apparent swings in public opinion have driven big moves in financial markets as investors try to anticipate the outcome of the vote.

The British pound and global stocks have moved higher in the past week and traditional safe assets like U.S. government bonds and gold have fallen as investors become more confident Britons will vote to remain in the EU, avoiding a disruption to Europe's economy.

GLOBAL STOCKS: Stocks have jumped over the last week, especially in Europe, as investors grew more certain that Britain will vote to stay in the EU. The main stock indexes in Germany and France are both up more than 6 percent this week and Britain's FTSE 100 is up more than 5 percent. U.S. stocks are up a more modest 1.6 percent. Those gains could evaporate if Britons vote to leave the union, which would cast uncertainty over Britain's economy and the future of the European Union.

THE POUND: The British pound has climbed over the last few days and is now at its highest level of the year. The pound is currently worth $1.48 against the dollar, far above the $1.41 it fetched a week ago as traders worried that a British departure from the European Union would weaken the country's economy. In February it traded as low as $1.39.

BRITISH COMPANIES: British financial and real estate stocks have climbed sharply over the last week as investors grew more certain that Britain's status won't change. Those sectors are perceived to depend on Britain remaining an open economy with strong ties to the rest of the Europe. Developers Taylor Wimpey and Persimmon have rallied 12 percent in the last week, and Barclays bank and Lloyds Banking Group are up 17 percent since June 16.

WHAT'S NEXT: Moody's chief economist Mark Zandi estimates that the European economy would slow down by 0.25 percent if Britain leaves the EU, and the global economy would slip about 0.1 percent. That may not seem like much, but the global economy is already weak and could respond poorly to heightened uncertainty over the future of the EU. Federal Reserve Chair Janet Yellen has also said a British departure could affect the U.S. economy. Beyond Thursday's vote, the bigger question is what would come after a British departure. Will other countries also vote to leave, threatening the decades-long effort to build an economic union in Europe? What will happen to the global economy if they do? It's hard to predict, and investors don't like uncertainty.

SEEKING SAFETY: Since nobody is completely sure about the consequences of the vote, investors spent recent weeks selling stocks and seeking the safest investments possible, including U.S. government bonds, high-dividend utility stocks, and gold. With the odds of "remain" looking better, they've been willing to take a few more chances.

BONDS: U.S. government bonds are considered one of the safest investments in the world, and more people bought them as the "leave" campaign seemed to gain ground in polls. When bond prices go up, the yields on the bonds go down, and yields were already very low. Last week the yield on the 10-year Treasury note, a benchmark for many kinds of loans including mortgages, went as low as 1.57 percent, its lowest level in almost four years. Since then the yield has risen to 1.73 percent, a big move, as investors sold bonds.

Low bond yields are bad for banks because they mean low interest rates on loans and lower profits. So when investors feel more certain Britain will stay in the EU, it sends bond yields and long-term interest rates higher, which is good for banks. Since London is Europe's financial capital, European banks may feel some of the worst pain if Britain leaves the EU.

GOLD: The price of gold climbed for seven days in a row and reached its highest price in more than a year last week as worries about the vote increased. Gold is now on a five-day losing streak. A week ago gold went as high as $1,298 an ounce, its highest level since January 2015. Since then it has gone down 2.7 percent to $1,263 an ounce.

CALL-IN: Investors bought utility and phone company stocks in recent weeks as they worried about the vote. Those stocks are similar to bonds: they tend to be stable and pay out a lot of cash. Utility and phone companies are the best performing parts of the U.S. stock market over the last month, but they've weakened over the last few days as the "remain" campaign appeared to strengthen, making investors more willing to take on risk.

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Carlo Piovano contributed to this story from London and David McHugh contributed from Frankfurt.