Brit risk: Brexit vote will spur market volatility, strategist warns

by Paayal Zaveri

Uncertainty around Britain's possible exit from the European Union, also known as the Brexit, could foster a highly volatile market for the next few weeks, according to strategists.

"Markets I think have really been caught off guard by the recent trend towards polling that says Brexit leave is preferable to Brexit remain among likely voters," Nick Colas of Convergex said Monday on CNBC's "Trading Nation."

Recent polls indicate more than 50 percent of British voters now favor the U.K. leaving the 28-nation EU. Many, including British Prime MinisterDavid Cameron, say departing the bloc would have disastrous consequences for not only the British economy but also other European countries. On the other hand, pro-exit voices like The Sun newspaper contend that "outside the EU we can become richer, safer and free at last to forge our own destiny." The referendum on June 23 is likely to be a close vote.

While acknowledging that Google Trends data show searches for "Brexit leave" are 50 percent higher than "Brexit stay," Colas said rather than this being an indicator of voters favoring leaving the EU, it shows that undecided voters are doing their homework. Colas said he believes online bookmakers are right in saying there is a roughly 30 percent chance Britain will vote to leave.

Meanwhile, on betting market PredictIt, a 45 percent chance of a Brexit is implied.

"So it seems like stay is the right choice," said Colas, chief market strategist at Convergex. "But it seems like we're also going to hear a lot of chatter saying the other side before it actually happens," which could translate into a great deal of market uncertainty.

Rich Ross of Evercore ISI said any such volatility will boost the dollar. "We're going to get upside volatility," he said. "The kind of volatility that most of us like to see when you look at the dollar index."

Turning to a chart of the British pound over the last 30 years, Ross, head of technical analysis at Evercore, noted periods of weakness in the currency tend to presage "a very strong run for stocks."

"In this case with the S&P just 1 percent off an all-time high, it has the potential to provide a catalyst for a breakout from a multiyear trading range," Ross said.

Courtesy of cnbc.com