Upcoming Brexit Vote Rattles U.S. Markets; 'Yes' Vote Could Trigger Even Bigger Selloff

Concerns that the Brits may vote to leave the European Union in next week's Brexit referendum is riling the U.S. equity markets, with the S&P 500 plunging more than 2% over the past week. And experts warn even more turmoil may lie ahead - including a possible full-blown correction - if those fears become a reality.

Until recently, U.S. equity investors have largely ignored the Brexit referendum, on the belief that Brits wouldn't pull the trigger on voting day and would ultimately remain in the EU. But recent polls are showing that momentum appears to be growing for those wanting to leave the EU and that a much tighter - and less certain - vote is at hand.

"Polls show the 'leaves' are 47%, the 'stays' are 42% and there's 13% undecided," said John Blank, chief equity strategist at Zacks Investment Research. "Nobody has a clear majority."

And that's causing global markets to swoon and traders to rethink their strategies. The euro and British pound have both sold off against the U.S. dollar.

Even the Federal Reserve has delayed plans to raise interest rates, partly due to uncertainty over Brexit.

"There's significant uncertainty over what will happen," said Robert Baur, chief global economist at Principal Global Investors. And the markets hate uncertainty, he said.

The VIX, which is the S&P 500 volatility index or so-called "fear gauge," surged more than 50% from around 14 last Thursday to more than 22 on Tuesday, making it more expensive for investors to buy options to hedge against future stock price declines. Often, the VIX rises as the S&P 500 falls. So far, the S&P 500 has tumbled about 2% during that period.

Many experts are bracing for an even bigger selloff in the U.S. equity markets if the "yes" vote prevails on June 23.

"I would expect the market to have a further pullback of 3% to 5%," said Michael Palumbo, author of the book Calculated Risk, founder of Third Millennium Trading LLP (which specializes in stock options) and principal at MJP Capital.

Another expert is even more bearish. Axel Merk, president and chief investment officer at Merk Investments LLC, believes a "yes" vote could be the catalyst that pushes the U.S. markets into a full-blown correction. "I think US markets are extremely overdue for a 20% correction off the highs," said Merk. "Maybe Brexit will do it."

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