Markets will be dominated by the Brexit until the UK votes on Thursday. If the vote is in favour of leaving the EU, we expect the initial impact on markets to almost certainly be negative. However, there are several factors that might limit the downside:
Current nervousness should ease once the outcome is known, and recent volatility has been caused by this nervousness;
If the vote is in favour of leaving it will take some time for the changes to take place. In fact, the UK would probably remain a member of the EU for several more years. A solution that replicates EU membership in all but name is the UKs key goal;
Once analysed, there will be little effect on trade. Europe as a percentage of trade, has reduced dramatically for the UK since the global financial crisis, as Europe has stagnated whilst China, the US and emerging markets have grown;
Finally, fear messages coming from politicians will ease and they will change their tone to one of reassurance for businesses and investors;
One of the bigger risks of a UK exit is the fact it might empower EU-skeptics elsewhere in Europe and lead to a broader breakup of the EU. We would hope, however, that other countries would wait to see what deal the UK negotiates with the EU on exit terms before holding their own referendums.
Equity markets have been treading water for a while because of Brexit. The nervousness can be seen most clearly in the strong performance of safe haven assets such as the Japanese Yen and Gold.
If the vote is to remain, the strength of safe haven assets should unwind whilst equity markets and sterling should rally.
If the vote is to leave, markets will take it negatively and sterling will likely weaken significantly. It may also cause further delay for the US Fed in hiking rates, and induce additional monetary easing elsewhere including from the European Central Bank and the Bank of Japan.
However, as mentioned, these concerns are probably overdone and any sell-offs should calm down once rational analysis of a Brexit is carried out.