Nordea Says Don’t Be Caught Off Guard in ‘Bremain’ Relief Rally

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  • If U.K. stays, Nordic and other haven markets may take a hit
  • Nordea estimates a 60% probability Britain will stay in the EU

With some polls showing Britain might vote to leave the European Union in less than two weeks, investors are increasingly being told to adjust their portfolios to gird for a so-called Brexit.

But Nordea, Scandinavia’s biggest bank, says it might also be wise to prepare for the relief rally that would follow the June 23 referendum should Britons choose to stay. That means the pound and risky currencies will do well, while haven markets such as Scandinavia will take a hit.

“The market is positioned a lot according to the polls,” said Niels From, head of research at Nordea Markets in Copenhagen. “Whenever a ‘yes’ is confirmed, there will be some kind of relief.”

To be sure, the risk of a Brexit is too big to ignore, From says. But Nordea estimates a 60 percent probability that the U.K. will stay in the EU. “That’s our subjective assessment,” From said. “A ‘yes’ will immediately be positive for the pound and risky assets,” he said. Still, he cautions that a relief rally is likely to be short-lived as markets face a long list of risks including the U.S. election.

Nordic Angst

In Scandinavia, the fear of a British exit from the EU has already made itself felt in currency markets. The Danish central bank, which defends the krone’s peg to the euro, has resorted to the first currency interventions since February last year in an effort to stop capital from flooding into its AAA-rated assets.

Denmark’s krone this week hit a threshold -- 7.434 against the euro -- at which the central bank historically has intervened to weaken the currency, Nordea said in a note. By Friday morning, the krone was weaker, at about 7.436 per euro. According to Jens Naervig Pedersen, senior analyst at Danske Bank, currency interventions are probably continuing this month as the central bank tries to prevent the krone appreciating.

If Britain does leave the EU, then “there will be a visible appreciation pressure on Norwegian kroner and Swedish kronor,” From said. Europe’s debt crisis makes a good reference point for how things will pan out in that event, he said.

“A Brexit, if that’s the outcome, will create major uncertainty in markets causing risk aversion,” From said. There’ll be a “flight to safe havens and volatility in all asset classes.”