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Warnings of high volatility and trading suspensions as traders brace for Brexit

UK better off on 'lifeboat' than EU Titanic: Jim Mellon
Brexit countdown
Time for UK to leave EU: Rees-Mogg

Banks and business leaders around the world have issued stark warnings to their clients about possible market volatility should the majority of the U.K. public vote to leave the European Union in a referendum on Thursday.

As the countdown to voting began, notes were issued by financial institutions warning of the immediate impact of a Brexit vote on global financial markets – especially those based in the City of London. Broadly, opinion polls show that the vote is too close to call with equal support for the remain and leave camps.

Credit Suisse issued a note on Wednesday warning of market volatility in the immediate aftermath of the result, which is expected to become clear around 4 a.m. London time on Friday morning.

"The correlation between betting market odds and global risk appetite has been extraordinarily high in the past few weeks. That suggests an immediate, large and highly correlated move in both safe and risk assets once the outcome is clear," the analysts said, adding that "a leave vote could push our measure of risk appetite into panic."

Separately, Credit Suisse said it would cut its year-end FTSE 100 target by 6 percent if a Brexit occurred, Reuters reported.

The analysts noted that two factors would be immediately important after the vote: the margin of a leave vote and "when, or if, the U.K. activates article 50 of the EU treaty."

Matthew Lloyd | Bloomberg | Getty Images

Article 50 (of the 2009 Lisbon Treaty) sets in motion the process of leaving the EU which can take up to two years to complete. Once activated, there is seen as no way back for the U.K. (all other 27 EU nations would have to agree if the U.K. asked to return).

Credit Suisse did not expect Prime Minister David Cameron to activate Article 50 on Friday if a Brexit vote occurred. However if he were to do so, it would be "significant," the analysts said.

"As for the economic impact, we would expect a shallow U.K. recession and euro area slowdown in the second half of the year, and associated easing measures from both the Bank of England and the ECB. But the former may be contingent on the extent and nature of the likely fall in sterling."

Meanwhile on Monday, Bank of America issued a warning to clients of possible delays in their trades and temporary suspensions if markets should become very volatile following a possible Brexit vote.

Morgan Stanley also warned last week that the FTSE 100 index could fall "as much as 16 percent" in the event of a Brexit, Reuters reported. On Tuesday, billionaire investor George Soros said that the pound could fall 15 to 20 percent against the dollar on a Brexit vote (link) to around or even below $1.15.

'Euro Titanic'

Jim Mellon, chairman of investment business, the Burnbrae Group, told CNBC on Wednesday that the euro zone economy was akin to the Titanic, the supposedly "practically unsinkable" ship that collided with an iceberg and sunk on its maiden voyage in 1912.

Mellon believed that sterling could fall to $1.32, and the euro could fall to $1.10 should the Brexit camp gain the most votes. On Wednesday, the pound was trading at $1.4676 and the euro at $1.1292. He is backing the leave campaign and said that a decline in the pound would be a good thing.

"I think the pound is overvalued at the moment anyway and it should fall to around $1.30 because we have a 7 percent of GDP (gross domestic product) current account deficit so it needs to fall in my opinion to help British exporters."

Mellon, who is estimated to have personal wealth of around £850 million ($1.2 million), has been called the "British Warren Buffett" although he rejects the moniker. He said that markets were expecting a remain vote, despite issuing warnings, but that investors should be wary with the vote too close to call.

"They might be in for a surprise though. The weather (on Thursday is not expected to be good) and that could help the leave campaign, they're more committed than the remainers and there's a lot of people going to Glastonbury (music festival) who are young and typically would be remainers who may not vote at all. So my general view is it's still 50/50 but if I had to bet I would say we're going to stay in by a very narrow squeak."

Mellon warned that, ultimately, the European economy was heading for trouble whether Britain decided to remain a part of the 28-country economic and political bloc or not.

"I think the European Union itself – because of the euro - is going to fracture over the next few years. France and Italy are in classic debt traps and those are going to result in bond market flight over the next there to five years resulting in a division of the euro zone. In those circumstances, Britain is better-off in a lifeboat than the euro Titanic as it sinks."

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