The Fed’s June rate hike decision is due in just over 24 hours, but at this moment nobody cares for two reasons: the market implied probability of a rate hike announcement is 0% (technically, less than zero), and, as DB puts it, “the UK EU referendum is suddenly totally dominant in financial markets” – the increased focus comes as the leave campaign has gathered steam as 4 polls yesterday afternoon/evening put the ‘leave’ campaign ahead.

• ICM phone and online poll showed 53% would vote to leave EU and 47% to remain. (Guardian)
• YouGov/Times poll showed 46% would vote to leave EU and 39% to remain. (The Times)
• ORB/Telegraph poll showed 49% would vote to leave EU 48% to remain. (The Telegraph)

But it’s not just the volatile polls this time: overnight Britain’s biggest selling daily newspaper The Sun has backed the campaign for the UK to leave the European Union, delivering a major boost to the Brexit camp just nine days before the EU referendum. In a front-page article headlined “BeLEAVE in Britain”the Rupert Murdoch owned tabloid declared that remaining in the EU would be “worse for immigration, worse for jobs, worse for wages and worse for our way of life”.

This has boosted concerns which emerged over the weekend, that a major shift in UK public sentiment toward Brexit is underway, which in turn proceeded to slam global risk markets yesterday, and continued to do so today. In fact, increasing odds of a U.K. exit from the European Union boosted demand for havens, sending Germany’s 10-year bond yields below zero for the first time.

The risk off move was widespread: US treasuries rallied for a sixth day, with the yield falling four basis points to 1.57%, having reached the lowest since Feb. 11; Treasury yields fell to records in Australia and Japan, stocks in Europe slid for a fifth day, while the yen rose against its 31 major peers. U.S. oil slipped toward $48 a barrel. Naturally, the pound fell to two month lows as Brexit implied odds hit a new record high.

The shift in investor sentiment in just the past week has been phenomenal: from sheer complacency, there is now downright tangible panic just below the surface. Case in point: “Nobody buys bunds at these yield levels thinking they are attractive,” said Jussi Hiljanen, head of European macro and fixed income strategy at SEB A/B in Stockholm. “Demand for haven assets are being driven by fear of Brexit and growth concern. Investors are buying bunds as a hedge against uncertainty.”

Others piled on: “people are now insulating portfolios against the worst-case scenario as polls indicate some momentum for the Brexit camp, but the European policy response is underestimated,” said William Hobbs, head of investment strategy at the wealth-management unit of Barclays, from London. “It doesn’t mean the sentiment can’t swoon after, but the contribution of the U.K.’s economy to world’s capital markets is, in the end, limited. Europe looks better equipped than before to handle such a risk.”

And just like yesterday, European stocks are getting slammed the most, with the Stoxx Europe 600 Index sliding over 1% , heading for its biggest five-day decline since February, amid investor concern that the tide has turned in favor of Britain seceding from the EU; all 19 groups on the Stoxx 600 fell, with miners and carmakers sliding the most. Among shares active on corporate news, GAM Holding AG tumbled 18 percent after the Swiss asset manager said first-half profit will probably halve as performance fees dry up.

Futures on the S&P 500 slipped 0.2%, indicating equities will extend losses after falling for a third day Monday, their longest losing streak in a month. The MSCI Emerging Markets Index fell 0.8 percent, losing 4.7 percent in four days. Equity benchmarks in Russia, South Africa, Poland, Turkey and the Philippines declined at least 1.3 percent.

Investors will look to an advance report on retail sales Tuesday for indications of the health of the world’s largest economy.

Market Snapshot

• S&P 500 futures down 0.3% to 2063
• Stoxx 600 down 1.4% to 322
• FTSE 100 down 1.2% to 5970
• DAX down 1.2% to 9537
• German 10Yr yield down 5bps to -0.03%
• Italian 10Yr yield up 2bps to 1.48%
• Spanish 10Yr yield up 3bps to 1.53%
• S&P GSCI Index down 1% to 377.4
• MSCI Asia Pacific down 0.7% to 126
• Nikkei 225 down 1% to 15859
• Hang Seng down 0.6% to 20388
• Shanghai Composite up 0.3% to 2842
• S&P/ASX 200 down 2.1% to 5203
• US 10-yr yield down 4bps to 1.57%
• Dollar Index up 0.49% to 94.83
• WTI Crude futures down 1.5% to $48.15
• Brent Futures down 1.3% to $49.70
• Gold spot down 0.3% to $1,280
• Silver spot down 0.9% to $17.29

Global Top News

• 4 Polls Put U.K. on Course to Leave EU as ‘Sun’ Backs Brexit: Leave campaign ahead in both phone and online polling; biggest-selling newspaper uses front page to support leaving; Pound Falls Toward Two-Month Low on Brexit Vote Concern
• Fed Grip on $2.5 Trillion Treasury Stash Seen Firm for Years: Traders now see less than a 50% chance of the next increase coming this year
• NXP Selling Products Unit for $2.75b to Chinese Group: Buyers are Jianguang Asset Management and Wise Road Capital; Nexperia business had $1.2b in revenue in 2015
• Goldman Tied to Rival Bidder as Morgan Stanley Wins on Microsoft: Morgan Stanley won the role as Microsoft’s adviser on its agreement to buy LinkedIn, climbs to No. 1 dealmaker for tech this year
• BofA CEO Eyes Market-Share Gains as Europe Peers Sound Alarm: U.S. banks against tough rules, markets are still stronger than many overseas rivals, will take their business: CEO Moynihan
• Apple Opens Siri to Developers in Effort to Catch Up With Rivals: Apple unveiled software that will allow its voice- activated personal assistant Siri to order pizza, call for a cab or check a bank balance
• Redstone’s Ex-Girlfriend Seeks New Trial Over Mental Capacity: Manuela Herzer claims she has new evidence to prove her case

Looking at regional markets, we start in Asia which traded mostly lower following the losses in the US, where declines in energy dragged US stocks to 2-week lows, while the looming FOMC decision and Brexit concerns further added to the cautious tone. Nikkei 225 (-1.0%) fell below the 16,000 level as JPY broke below the 106.00 handle, while ASX 200 (-2.1%) is the laggard as it tracks the weakness across global equity markets on its return from its extended weekend. Elsewhere, the Shanghai Comp (+0.3%) shook off the negative tone after the PBoC upped its liquidity injection, while participants are also tentative ahead of the MSCI decision on whether to include Chinese A-shares. Finally, 10yr JGBs traded higher amid weakness seen in Japanese stocks, with yields across the curve pressured as 5yr, 10yr and 20yr yields all printed fresh record lows.

Top Asian News

• Yuan Approaches Five-Year Low Amid Concern Over Economy, Brexit: Currency impact from any MSCI inclusion to be marginal, SocGen says
• MSCI Is About to Make Its Big Call on World’s Worst Stock Market: Index clearing house to announce whether to add Chinese equities
• Best-Performing Asian Stock Market May Get Extra MSCI Boost: Pakistan has 70% chance of upgrade to EM, says Tundra Fonder
• India Wholesale Inflation Rate Exceeds Estimate to 19-Mo. High: WPI rate rises 0.79% in May, highest since Oct. 2014
• Disney Plays by China Rules With Shanghai Park, Media Strategy: Content ambitions hemmed in by piracy, government push-back
• Baidu Reduces Revenue Forecast on Ad Restrictions: Rules follow death of student who used results to treat health

In Europe markets continue to remain gripped by the global uncertainty surrounding the EU referendum and the Fed with more polls overnight leaning to the leave camp, subsequently adding fuel to the fire regarding Brexit fears.

• ICM phone and online poll showed 53% would vote to leave EU and 47% to remain. (Guardian)
• YouGov/Times poll showed 46% would vote to leave EU and 39% to remain. (The Times)
• ORB/Telegraph poll showed 49% would vote to leave EU 48% to remain. (The Telegraph)

As such, credit markets have yet again soared with global bond yields plummeting to record lows in the past couple of weeks, with Bunds now yielding negative for the first time on record, while Gilts also drop to all-time lows. Elsewhere, equities continue to find no reprieve with broad based weakness across Europe (Euro Stoxx -1.6%). In turn, the aforementioned global uncertainty, coupled with the fall in crude prices in which WTI has tested USD 48/bbl to the downside has seen pressured the FTSE 100 to break below 6,000 for the first time since February.

Top European News

• Germany’s 10-Year Bond Yield Declines Below Zero for First Time: The nation joined Japan and Switzerland in having 10- year bond yields of less than zero
• Daetwyler to Buy Premier Farnell for About $1.1b: Premier Farnell investors to get 165p/share in cash; offer represents a premium of about 51% from Monday’s close.
• France Braces for New Street Demonstrations Against Labor Bill: labor union CGT maintains opposition to government plans.
• Allianz Buying U.K. Stocks That Brexit Concern Makes Attractive: company fundamentals seen the same regardless of outcome
• GAM Holding Plummets After Saying 1H Profit to Drop 50%

In FX, the pound continued to weaken, dropping 0.9% versus the dollar, approaching a two-month low. Four opinion polls from three separate companies have put the campaign for Britain to leave the EU in front of the “Remain” camp. A gauge of the pound’s anticipated volatility over the next two weeks — a period that includes the June 23 referendum — climbed to the highest on record. “Risk sentiment has taken a beating with volatility up partly on latest Brexit polls still showing the U.K. is on course to quit the European Union,” said Ray Attrill, co-head of currency strategy at National Australia Bank Ltd. in Sydney. “Amid all of this, the yen continues to demonstrate its preeminent safe-haven characteristics.” Japan’s currency strengthened 0.5 percent, nearing its highest level since 2014. Against the euro, Japan’s currency rose for a sixth day, gaining 1 percent. China’s yuan weakened in Shanghai to within 0.2 percent of a five-year low reached in January, when a slide in the currency heightened concern about the health of the nation’s economy and spurred a selloff in global stocks and commodities. The MSCI Emerging Market Currency Index dropped 0.5 percent and is down 1.5 percent in four days. Russia’s ruble and South Africa’s rand led declines, declining at least 1.2 percent.

In commodities, commodities followed equity markets lower. Oil fell for a fourth day, with West Texas Intermediate crude sliding 1.6 percent to $48.08 a barrel and Brent dropping 1.5 percent to $49.61. The global oil market surplus is shrinking more quickly than expected and the market will be almost balanced next year as demand rises faster than production, the International Energy Agency said Tuesday. Zinc led a decline in industrial metals, falling 1.7 percent to $2,042.50 a ton. Copper lost 0.4 percent while aluminum gained 0.5 percent after Chinese smelters reached an agreement that could to cut production. Gold dropped 0.4 percent to $1,279.43 an ounce.

Bulletin Headline Summary from RanSquawk and Bloomberg

• Fixed income markets continue to extend, with Bund yields falling below 0% for the first time
• Equities tumble amid the risk off sentiment, which sees USD/JPY fall below 106.00
• Highlights Include US Import price index, Business Inventories and Retail sales advance as well as API Crude Oil Inventories

• Treasuries higher in overnight trading as recent polls in U.K. show “Leave” campaign ahead of “Remain” and that nation’s largest paper comes out in support of a Brexit; Germany’s 10-year government bond yields tumbled below zero for the first time on record.
• There’s no road map for European authorities facing the prospect of a British exit from their 28-nation union — by design. Officials in Brussels are under orders not to commit any scenarios to paper to avoid alarmist leaks
• The pound fell toward a two-month low as concern grew that the U.K. will vote to leave the European Union. A gauge of the pound’s anticipated volatility over the next two weeks climbed to the highest on record
• Banks took 2.46 billion pounds ($3.5 billion) in the first of three extra liquidity operations the Bank of England is holding this month to shore up funding as the U.K. considers its future in the European Union
• U.K. inflation unexpectedly held at 0.3% in May as rising transport costs were offset by falls in the price of clothing and food. Core inflation, which excludes volatile food and energy prices, remained at 1.2%
• Spanish and Italian banks scoop up more than half of the money the European Central Bank provides in its regular refinancing operations, signaling that borrowing in financial markets remains difficult or unattractive for them
• Japan and Australian 10-year yields fell to record lows, extending a global bond market rally. Japan’s benchmark dropped to minus 0.17%. Australia’s slid to 2.05%
• The Federal Reserve’s liftoff from near-zero interest rates in December sparked angst over how quickly the central bank would start whittling down its $2.5 trillion hoard of Treasuries. It turns out that investors had little cause for concern

DB’s Jim Reid concludes the overnight wrap

The UK EU referendum is suddenly totally dominant in financial markets. The increased focus comes as the leave campaign has gathered steam as 4 polls yesterday afternoon/evening put the ‘leave’ campaign ahead.

First the Guardian/ICM polls late yesterday afternoon UK time (after the close) reported a six point lead in their phone and online polls. The big story with this poll is that the lead was fairly consistent in both their phone and online polls. The former have tended to favour the ‘remain’ side. Recent polls showing ‘leave’ in the lead were mainly online polls only so this is a major development. Then at around 10pm BST two more polls continued to show a similar trend. A YouGov online survey showed ‘leave’ at 46% with ‘remain’ at 39%, and an ORB phone poll had ‘leave’ at 49% and ‘remain’ at 48% among those certain to vote. If there was a silver lining for ‘remain’ then it can be found in ORB suggesting a 49%/44% split in favour of ‘remain’ amongst all voters.

Events appear to be starting to mirror the Scottish referendum a touch (but perhaps more extreme) where markets were suddenly roiled by a shock poll suggesting ‘leave’ had moved into the lead. In the end this may have motivated those wanted to stay in the Union to vote. One wonders whether such recent polls will have a similar impact. Impossible to tell at this stage.

Asian equities are weak but the polls don’t seem at this stage to have accelerated the downward momentum seen yesterday. The Nikkei is around -1.5% lower as we type. Chinese equities are only around 0.25% lower as they await news tomorrow as to whether they get included in MSCI global indices. US equity futures are flat at the moment but expect the polls to be the focus of attention this morning in Europe and perhaps also that the front page of this morning’s Sun newspaper (the largest circulation in the UK) which has backed the ‘leave’ campaign.

Into the US close we only had the two ICM polls and equities again out-performed stateside but the S&P500 still fell -0.81%. However the real stunner was the 22.78% climb in the VIX from 17.03 at Friday’s close to 22.97 last night. US Equities rarely see such sanguine performance when the VIX climbs by that amount in a day. At least half of the rise followed the two ICM polls and could probably be seen as investors hedging their risk.

Before this European equity markets posted their fourth consecutive day of losses with the STOXX dropping by -1.84%. Every industry group was in negative territory again, with the losses once again led by Banks (-2.93%), Insurance (-2.66%) and Financial Services (-2.52%) sectors as Brexit concerns continued to mount even before the latest poll. The sell-off was once again broad based as only 19 out of the 600 companies in the index ended the day in the green. European credit markets followed suit with iTraxx Main and Crossover widening by +4.2bps and +16.2bps as both spreads hit their widest levels in three months.

At the other end of the risk spectrum, German 10Y yields inched marginally higher to 0.024% (+0.3bps) after touching all time lows yesterday. Meanwhile UK 10Y Gilt yields continued to drop, falling to 1.21% (-2.3bps) on the day.

Sterling faced a roller coaster ride on the day, swinging from an early low of 1.4116 to an intraday high of 1.4302 as speculation in the market falsely anticipated a ‘remain’ lead in the latest ICM poll before declining again to 1.4230 (-0.19%) after the actual correct ICM poll results were released. We’re at $1.4187 this morning after the additional polls.

Our Chief UK Economist George Buckley examines some of the latest issues surrounding the vote while also discussing some of the logistics of the actual day of the vote.

Staying with Europe I wanted to highlight a hard hitting piece by our Head of Research and Chief Economist David Folkerts-Landau suggesting that the ECB has seen policy gone awry with the need for them to change direction. He suggests that after seven years of ever-looser monetary policy there is increasing evidence that following the current dogma, broad-based quantitative easing and negative interest rates, risks the long-term stability of the eurozone. David believes that it is already clear that lower and lower interest rates and ever larger purchases are confronting the law of decreasing returns but they still push policy to further extremes. This causes mis-allocations in the real economy that become increasingly hard to reverse without even greater pain. Worse, by appointing itself the eurozone’s “whatever it takes” saviour of last resort, the ECB has allowed politicians to sit on their hands with regard to growth-enhancing reforms and necessary fiscal consolidation. Thereby ECB policy is threatening the European project as a whole for the sake of short-term financial stability. The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics. The piece argues that in its fight against the spectres of deflation and unanchored inflation expectations the ECB’s monetary policy has already become too loose. Hence, they believe the ECB should start to prepare a reversal of its policy stance. The expected increase in headline inflation to above one per cent in the first quarter of 2017 should provide the opportunity for signalling a change. A returning to market-based pricing of sovereign risk will incentivise governments to begin growth-friendly reforms and to tackle fiscal stability. He thinks flagging the move should dampen adverse reactions in financial markets. David concludes by suggesting that normalising rates would be seen as a positive signal by consumers and corporate investors. The longer the ECB persists with unconventional monetary policy, the greater the damage to the European project will be.

On the subject of ECB purchases yesterday we learnt that they purchased €348mn on their first day of corporate bond purchases last Wednesday. They were the only day’s purchases that would have settled before Friday’s reporting cut-off and only includes secondary. Obviously one has to be cautious about extrapolating one day of data, especially as they probably knew this one particular day would be a focal point until more data was collected. Having said this, the high number helps confirm our expectations that the ECB plans to conduct meaningful corporate bond purchases making us more confident that our ‘over €5bn/month’ forecast (average with big ranges over the holiday season) is achievable in the early stages at least, notwithstanding anomalies around the upcoming summer months. We probably won’t know until later in the year if they are starting to struggle to maintain a high initial run rate.

After a quiet day yesterday in terms of data, we have some interesting numbers due today. We’ll see the latest May inflation data for the UK with the CPI (expected +0.3% mom; +0.1% previous), RPI (expected +0.3% mom; 0.1% previous) and PPI (expected +0.3% mom; +0.4% previous) numbers due – all of which should be watched closely ahead of the BoE meeting on Thursday. We will also get the final May CPI numbers for Spain (expected +0.5% mom; +0.5% previous). Following that we also have the April industrial production numbers out for the Euro area (expected +0.8%; -0.8% previous).

Over in the US, we will see the NFIB Small Business Optimism index for May which is expected to be unchanged over the previous month (expected 93.6). Following that we have the retail sales number for May that is expected to clock in at +0.3% mom (+1.3% previous) and will likely be the most closely watched release since payrolls. Aside from that we will also see the import price index number for May which is expected to come in at +0.7% mom (+0.3% previous).

However everything is starting to be overshadowed by Brexit fears.