European shares rose and sterling gained against the dollar and yen on Wednesday as expectations of dovish words from the US Federal Reserve soothed investors on edge over whether Britain will vote to leave the European Union.
Worries that Britain, the world’s fifth-largest economy, could quit the EU after June’s 23 referendum have dominated markets this week and driven investors towards safe-haven assets such as gold and the Swiss franc.
Several recent opinion polls have put the “Leave” campaign ahead, though bookmakers’ odds still favour a vote to remain.
But with the Fed seen certain to leave interest rates on hold later in the day and markets giving no more than a 15 per cent chance of a hike this year, investors on Wednesday showed a greater appetite for risk, with the yen and the Swiss franc taking a back seat.
Sterling strengthened by 0.3 per cent to $1.4176, having hit a two-month low of $1.4091 on Tuesday. The pound also rose half a per cent to 150.53 yen.
The dollar rose 0.2 per cent to 106.33 yen, having fallen as far as 105.63 yen on Tuesday. The euro was flat at $1.1215 but rose 0.3 per cent against the Swiss franc to 1.0829 francs.
Britain’s blue-chip FTSE 100 share index rose 0.9 per cent, nonetheless underperforming the pan-European FTSEurofirst 300 index, which was up 1.1 per cent, breaking a five-day Brexit-induced losing streak.
MSCI’s broadest index of Asia-Pacific shares outside Japan eked out slight gains, though Japan’s Nikkei stocks index added 0.4 per cent.
Chinese stocks took in their stride the fact that MSCI again declined to admit Chinese domestic shares to its main emerging markets index. The blue-chip CSI 300 index rose 1.3 per cent.
“With Chinese markets shrugging off the MSCI move, risk appetite is slightly better than what we saw in the past few days. But markets are wary before the Fed meeting and the Bank of Japan meeting tomorrow and of course the Brexit worries,’’ said Yujiro Goto, currency strategist at Nomura.
Economists have warned that Britain leaving the EU’s single market would not only hit British assets but could even trigger a European recession.
Ireland, Britain’s near neighbour and a major trading partner, felt the impact of Brexit fears as the differential between Irish and German 10-year government bond yields hit its widest in nearly a year at 0.88 per cent.
“Ireland in the last few days has been the clear underperformer as markets penalise the country’s strong trade links with the UK,” ING rates strategist Martin van Vliet said.
German 10-year bonds, deemed one of the world’s safest assets, yielded 0.7 basis points, having turned negative on Tuesday for the first time, falling as low as -0.03 per cent.
Japanese 10-year government bond yields hit the latest in a series of record lows at minus 0.17 per cent, with traders blaming Brexit fears.
The Bank of Japan unveils its latest policy decision on Thursday and is widely expected to keep rates unchanged.
Oil prices fell, with international benchmark Brent crude, dropping for a fifth consecutive day. It last traded at $49.49 a barrel, down 32 cents.
Gold dipped 0.3 per cent to $1,281 an ounce, having touched its highest since May 6 at $1,289.80 on Tuesday.