No Justification For Big Rally On Latest Brexit Polls

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Includes: BCS, BMDSD, BNPQY, CRARY, CS, DB, FXB, HSBC, ISNPY, RBS, SCGLY, UNCFY
by: Daryl Montgomery

Summary

Three days before the election, three BREXIT polls were released that indicate the vote is too close to call.

European stocks, and bank stocks in particular, along with the British pound had a big rally on this news.

The rally was not justified. A detailed analysis indicates the Leave faction still has the advantage.

Editor's Note: Author is a former pollster.

There was a slight shift in opinion in the BREXIT polls over the weekend and this caused a major rally in European stock markets, bank stocks in the UK and on the continent, and in the British pound. The sharpness and suddenness of the rally, based on very little really (the polls were mostly wrong in the British general election last year and shouldn't be taken as gospel in the upcoming election), were proof that it was a short-covering rally. It is also an indication of just how powerful the market's reaction will be to the actual BREXIT vote this Thursday, regardless of the outcome.

European stock markets were up 3.0% or more. In the UK, the FTSE100 was up 3.0%, in Germany, the DAX30 was up 3.4% and in France, the CAC40 was up 3.5%. It is interesting to note, that while opponents of the UK leaving the EU claim it will damage the UK the most, stock markets are indicating that it is the continent that will suffer more. Bank stocks had the biggest rally of all with British banks doing best. Lloyd's Group was up 8.1%, Royal Bank of Scotland (NYSE:RBS) was up 7.1%,Barclay's (NYSE:BCS) was up 6.8%, and HSBC (NYSE:HSBC) up 2.7%. As for French banks, Bank Paribas (OTCQX:BNPQY) was up 4.6%, Credit Agricole (OTCPK:CRARY) was up 3.8%, and Société Générale (OTCPK:SCGLY) was up 2.9% Troubled Italian banks Unicredit (OTC:UNCFY), Intesa SanPaolo (OTCPK:ISNPY) and Monte dei Paschi (OTCPK:BMDSD) were up 3.4%, 3.0% and 5.2% respectively. Germany's Deutsche Bank (NYSE:DB) was up 4.4% and Swiss bank, Credit Suisse (NYSE:CS) was up 2.3%. The British pound (NYSEARCA:FXB) was up 2.3%.

What caused this massive surge in these markets and stocks? Three polls were released after MP Jo Cox's murder by a deranged man last week. The media has done everything possible to claim this random act of violence will alter the final outcome of the vote. There is no reason that it should. Three recent polls supposedly show the Remain side is ahead, although none of them actually do. An Opinium Poll indicates the vote will be 44% to 44% (too close to call). A Survation/The Mail Poll had Remain ahead 45% to 42%, but with a sampling error of plus or minus 3.4% (too close to call) and a YouGov/Sunday Times Poll had Remain winning 44 to 43 (too close to call). A YouGov Poll/ITV Poll had the Leave vote ahead, however. So, based on three polls that were too close to call, the markets decided that Britain was definitely going to remain a part of the EU. An interesting approach to statistical analysis, to say the least.

A deeper understanding of the 2015 UK general election polling debacle and the internals of the BREXIT polls would give a rational person pause, however. The aggregate polls in 2015 had the Labour Party ahead for many months (in 2016, the Remain side has been ahead for many months). Toward the end, the Conservatives pulled neck and neck with Labour with around 35% support each. Based on the polls, either a Labour win or the Conservative Party being forced into a coalition was universally predicted by UK punditry. No one was predicting an out and out Conservative win, which was the ultimate outcome. The polls were off by around 7% - overestimating Labour's vote by 4% and underestimating the Conservative vote by 3%.

A post-mortem analysis indicated that UK pollsters over sampled younger voters. These voters are more pro-Labour and are currently considerably more pro-Remain than the general UK populace. So, unless this problem has been corrected (unlikely) the BREXIT polls are overestimating the Remain vote, just as last year's polls overestimated the Labour vote. Surveys in the current election have also independently indicated that people who support Leave are more likely to vote than the Remain faction this Thursday. So, a neck and neck poll result would indicate that the Leave side wins.

Comparisons are being made by pollsters to the outcome of the Scottish referendum, however, where voters allegedly changed their minds at the end and decided to remain in the UK. If this did indeed happen (it is necessary to assume that the polls taken just before the vote were correct, which may or may not have been the case), it is not comparable to the BREXIT vote. The Scottish referendum had an astronomical turnout of 85%, meaning effectively everyone who could do so, voted. Turnout differentials don't come into play under such circumstances since the participation rate is very high for all demographic cohorts.

Turnout for the BREXIT vote is likely to be much lower. The last vote on whether or not the UK should be part of Europe was held in 1975 and the turnout was only 66%. This, though, was in an era of higher voter turnout in the UK. Turnout could easily be lower than that in 2016. Surveys show only 56% of those under 25 (the strongest Remain voters) claim that they are going to vote, while 80% of those over 55 (the strongest Leave voters) say they will vote. The numbers will be less than these figures, though, because some people always say they will vote when they have no intention of doing so. They lie to the pollster because they don't want to look like bad citizens. Lower turnout also indicates all the hand wringing about how the Undecideds will break is meaningless. If they haven't decided by now, they're not going to vote.

At this point, the outcome of the BREXIT vote should be considered indeterminate. Unless you are a short-term trader with a trade horizon from a few minutes to a few days, the UK and EU stock markets in general, financial stocks, and the pound and the euro should be avoided until after the BREXIT vote and some clarity appears as to where the markets are going.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.