Brexit: How can the bookies say ‘remain’ when the polls point to ‘leave’

The polls say Britain is on its way out of the EU. The bookies still reckon it will stay, even if the odds have closed significantly in recent days. For the moment, the financial markets, while nervous, generally appear to be trading on the basis that Brexit will probably be avoided.

If this changes, either in the run-up to next week’s poll or as a consequence of the results, expects really serious sparks to fly.

We have already seen a taster of what a real Brexit impact might look like. Sterling has weakened and equities are nervous. Investors, particularly in currency markets, are hedging their positions in case Britain does exit, anticipating that this might lead to a sharp sterling fall.

Investors

And investors are putting money into so-called “safe havens” – places where they perceive there to be little or no risk, even if there might also be little or no return.

So this week we saw the extraordinary sight of German ten year bond yields falling into negative territory for the first time – in other words investors are paying the German government for the privilege of lending them money. This is not entirely driven by Brexit fears – international interest rates are at historic lows and the ECB is pumping billions into the markets by buying bonds.

However there is a real sense in the markets in the last few days that the fear of Brexit is now real, given the clear momentum towards the leave campaign in the polls, even if investors do not yet believe that the result is anyway certain.

On balance, despite the polls, the bookmakers still believe that Britain will remain. But the odds have closed a lot. At the moment bookies are quoting 8/15 on remain and 6/4 on leave.

This suggests a probability of around 60 per cent on a remain vote – still significant, but way down from 78 per cent just a week ago. And some bookies have been quoted as saying that “leave” could be the favourite by the weekend if the current momentum continues.

Cash

Like a horse race, bookies’ odds are driven by cash. Up to last week most of the big money was on “remain” – around 80 per cent of the actual cash had been placed on that bet, according to a spokesman for one of the major firms. Clearly this has started to change, and change quickly. Various “polls of polls” in the UK now generally put “ leave” fractionally ahead.

Those betting on Britain staying in the EU reckon that enough of the “ don’t knows” will, at the end, opt for stability, as happened in the Scottish referendum to get “ remain” across the line. But nobody knows – and investors will be closely watching the polls, and the odds.

In the meantime, gossip is spreading around the Brexit betting enclosure and more and more money has been placed on leave.

Those wondering what would happen in financial markets if Britain votes to leave will get a taster in the days ahead, if the odds continue to tighten.

This could lead to significant volatility in the lead up to the poll, particularly as nobody is quite sure what a Brexit vote would mean for markets, beyond a heck of a lot of uncertainty and possibly an initial sell off of sterling.

Investors will be watching the polls – but they will be watching the bookies even more closely. And few things are less predictable that a close two-horse race.