Global markets to stay volatile ahead of Brexit vote: Rabobank

Global equity markets, which have so far been complacent about the possibility of Britain actually leaving the European Union are now waking up to the it. This has triggered a belated bout of volatility, says Michael Every of Rabobank.He expects markets to remain extremely volatile untill the Brexit vote on June 23. Therefore, it is better to buy inflation related bonds or best raise cash levels, he says.The German bund yields going into negative territory yesterday also indicates anything other than a positive outlook, says Every in an interview to CNBC-TV18, adding that it is still unclear where growth will come frome in the longer-term.

Global markets have been jittery for the last few days bogged down by worries from what the US Federal Reserve would do in its two day meet and the upcoming Brexit vote. Emerging markets so far have not been too impacted by global jitters but they too are unlikely to go unscathede if Brexit happens. If the vote goes in favour of exit, then the UK bonds, sterling and even the euro will weaken significantly and this could mean a stronger dollar. This in turn would result in weakness for emerging market currencies and hence lead to volatilty in those markets too, says Every.Below is the verbatim transcript of Michael Every's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: Do you think we are just seeing early jitters in the market, can it get way more volatile in the run up to the polls and as more opinion polls start hitting the headlines? A: Of course it can. We have only seen the first couple of steps in that direction in the last few days up until now as I have been trying to make clear repeatedly. The market has been ridiculously complacent passing itself on the back of thinking that none of these physical risks matter and the voters will always do what the market wants but unfortunately, democracy doesn't work like that and it now appears that we may be getting what the market won't like and they are waking up to the fact and reacting. Sonia: How concerned would you be about the way the bond yields are shaping up? Yesterday the German bund yields went into negative territory for the first time. What does that indicate? A: It is obviously indicating anything other than the positive outlook. There is nothing new there. We saw 2-3 basis points (bps) move over the last few days. Psychologically, it is more important than anything, Germany has joined the elite club of countries with a negative 10-year yields. If you take a big step back and just look at the trend in 10-year yields in developed economies, it has been staggeringly clear for quite some time and if that continues to go down, we get a little outbreaks up within this channel and then temporarily everyone is looking at noise rather than signals. The market is very clearly saying it doesn’t see any inflation out there in the longer-term presumably due to the fact that it is realising the globalisation means you cannot have traditional inflation the way we used to and so it is unclear where growth is going to come from longer-term. Latha: I want to know how bad you think it can be for emerging markets? We have been kind of the outer circle of immediate impact zone, but the tremors are being felt. You think we can see 3-4 percent cuts by the time we get to 23rd? And the bigger question, if on 23rd it is indeed a leave vote, just some crystal ball gazing on what we should be prepared for. A: It can get worse, absolutely. So far as you quite rightly said, emerging markets have not really been in the eye of the storm because everybody is more worried about the developed world, particularly UK, Europe, etc. I am sure, in term, people will eventually turn to emerging markets and realise that it if developed world that is not looking good, emerging markets are not, too. But for once, fortunately, you are at the back of the key rather than the front. What can it mean for UK? Well, obviously, you can see significantly lower bond yields and significantly weaker sterling, probably weaker euro too which of course, therefore implies a stronger dollar which if we go back to the emerging markets again, implies weaker emerging market currencies and a lot of volatility. Sonia: So your stance for the last six months has been to stick with cash and not deploy money into the markets. Is that something that you are still advising investors to do? A: Very much so. If it is anything that you want to be dumpy diving into now at all, if you want to dive into US 10 year treasuries, head towards zero as everybody else is. Or secondly, if you are really looking further ahead, you might want to try and buy some inflation protected bonds now because assuming that at some point, we do get a bounce back in inflation and that kind of protection is very cheap and everyone is worried about deflation instead. Equities, I certainly cannot see a strong argument for being in them at the moment, not with this much uncertainty out there. Latha: Today’s Federal Open Committee (FOMC) would be a non-event, would you look at anything at all perhaps, other than the language of the statement? A: We have to look at the dot-plot and see just how dotty the Fed’s projections are and we can certainly assume they will be dotty particularly if they are talking about two hikes this year.