Sterling shorts subside as Brexit vote looms

Short-selling pressure on the pound has eased back after a surge in bets against the currency in early June, with the UK population poised to vote on the country’s membership of the European Union in two days’ time.

Stack of pound coins

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Short bets on sterling futures have declined after surging in early June ahead of the UK referendum

Both sterling and UK stocks have been subject to extreme volatility in the weeks leading up to the June 23 Brexit vote, with polls putting the ‘Leave’ campaign out in front earlier in the month only for the ‘Remain’ camp to mount a comeback in recent days, with the outcome now seen as too close to call.

A vote to leave the European Union is widely considered to lead to a fall in the value of the pound and lower stock prices, with a rash of bets against the currency seeing the number of net short positions on sterling futures more than double to 66,299 contracts in the week to June 7.

The following week, however, saw that figure on short positions drop 45% to a net 36,661 contracts, according to latest available data from the Commodity Futures Trading Commission, covering the week to June 14.

Markit data showed that short positions on UK companies’ shares have also fallen in recent days, after the Remain campaign gained momentum to avoid a squeeze.

The FTSE 100 index, comprising the biggest UK-listed companies, posted its largest one-day gain in almost four years on June 20 while sterling made its largest gains in eight years.

Anthony Lawler, head of portfolio management at GAM Alternative Investment Solutions, said there had been a strong relief rally after weekend polls suggested the likelihood of a vote to remain in the EU rising.

“By and large, hedge funds have reduced risk going into this vote rather than aggressively bet for an outcome either way,” he added. “From what we have seen, the moves in sterling and equities seemed a relief rally rather than a massive reduction in active shorting.”

Stephen Coltman, a senior investment manager at Aberdeen Asset Management, said that markets grew more concerned when bookmakers hiked the probability of a Brexit to 40%. This has since fallen to an estimated 25% probability, Coltman said, adding that markets had repriced accordingly.

“Managers are generally not taking a strong view on Brexit and have been overall reducing risk going into the referendum, in some cases maybe putting shorts on sterling to hedge risk they have elsewhere that could be affected by the vote,” he said.

Computer-driven hedge funds are large traders of this market volatility but Coltman said others are more concerned about having a robust portfolio than actively trading market moves. “Clearly, things are going to be volatile up to and after the event.”

Coltman said while there was a tremendous focus on the referendum, investors should bear in mind what happened elsewhere in Europe.

In Spain, which will vote on June 26 in a general election, left-wing Podemos has been doing strongly in opinion polls. Meanwhile, in Italy the protest party Five Star Movement won a landslide victory in local elections.

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