The media seems to think Brexit is a toss-up.  They would be wrong.  What really matters is what the “markets” (people who have money on it) think.  Are you more likely to believe: (1) a bunch of people whose livelihoods depend on something being made to look “newsworthy” or (2) a bunch of people who have looked at all angles and actually put money down on it?  Considering all of you are in the latter profession, I would think your answer would be #2.  According to your brethren in the odds-making world, the betting lines across the major bookies imply the odds of a Brexit are about 33%.   I’m not claiming to be any kind of Brexit expert, but everything I need to know is in that number.   This is a few percentage points higher than last week (pre-terrorism).  This is not a big move, but as we get more fallout (and possibly more attacks), it’ll be interesting to see how sentiment changes.  The reason I care is because…

Could Brexit delay the Fed?  The Brexit vote occurs on June 23.  The Fed meeting is on Jun 15 (a week earlier).  The question is, would a close Brexit vote affect the Fed, considering there may be some market uncertainty?  The pricing for the July meeting increased 50% this past week (FFN-Q spread went from 3bps to 4.5bps).  I believe most of this is the increased pricing of a chance of a pause in June because of Brexit.  I am not a believer that Brexit could cause the Fed to pause.  First of all, we need the vote to be close enough for it to matter.  Even if the vote looks close, I’m still not sure it matters.  I’m not saying some of the issues aren’t important – GBPUSD could get some volatility, and there will be winners and losers among companies.  But at the end of the day, the UK will most assuredly survive, and so will the EU.  Secondly, before the Brexit vote, we have the April FOMC meeting.  According to my “two-step hike” theory, the Fed needs to put the balance of risks back in (assuming they don’t listen to Bullard and scrap it) before they hike.  If the data continues to be firm and the Fed puts the balance of risks in at the April meeting, the immediate perception will be that the Fed will hike in June – not July.  Since June + July may be capped around 25bps (later post), I still prefer being short for the June meeting relative to the July.