by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] Polling suggests that the Brexit vote will be close.  However, that isn’t the message coming from the betting pools, where the leave camp lost another four points.

(Source: Bloomberg)

This chart shows the leave bets, which peaked around 45% but have fallen precipitously to the 24% level.  We suspect that Britain will vote to stay in the EU.  That outcome won’t completely eliminate the drama as a close vote could lead to a backbench revolt against PM Cameron.  However, for the markets, the “inside baseball” of U.K. politics won’t be a big deal.

Yesterday’s market reaction was a sign of relief.  Today we are seeing more of a careful tone, a market that wants the certainty that all will be OK with the U.K.  Still, the combination of a remain vote and an ever more dovish Fed (see below) should support risk assets into the second part of the summer.

That doesn’t mean there aren’t other concerns.  Southern Europe has not attracted much media attention but problems there remain.  The populist Five-Star movement in Italy won a major victory as its candidate won the mayoral contest in Rome.  A similar victory was recorded in Turin.  Although the ruling coalition remains in place, populism is a growing threat.  We expect the Renzi government to expand spending in front of a constitutional referendum in October.  This vote will concentrate more power in the lower house and make it easier to pass reform legislation.  PM Renzi has indicated he will resign if the referendum fails.  In Spain, elections will be held on Sunday.  The leftist Podemos party is gaining momentum in the polls and the most likely outcome will be another inconclusive vote where no alliance can form a government.  Although Spain and Italy are not offering the same degree of drama that we have seen from the U.K., the key point is that pressure will remain in Europe.

Chairwoman Yellen will face her semi-annual “grilling” from Congress today.  Expect much grandstanding and snarky questioning from our legislatures but, beyond that, we don’t expect any startling revelations.  We expect that the Fed will remain data-dependent, the economy will be described as improving but not perfect, and the Fed will continue to offer support where necessary.  The most pointed questioning will focus on bank regulation.  Concerns over “too big to fail” and desires to support the popular community banks will be front and center.  However, in the end, we expect that nothing much of substance will be revealed and little will change.

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