Stocks, bonds and currencies from Sydney to Toronto reacted furiously Monday after polls tilted toward a British vote to remain in the European Union, swings that portend further volatility in the days ahead.
After two weekend polls showed—by tiny margins—that British voters now favor remaining in the union, versus leaving, or Brexit, the British pound leapt more than 2% against the dollar to $ 1.4673, among its strongest performances in years. The S&P 500 added 0.6%, while the Stoxx Europe 600 jumped 3.7%, its best day since August. Japanese shares rose 2.3%, their steepest climb since April.
The sharp movements in markets portend days of exceptional volatility ahead of Thursday's vote—and gives signposts to how the financial world will react when the counting is done.
"This rally has just underlined how very nervous markets are," said Morten Helt, an analyst at Danske Bank. "You could easily imagine a poll tomorrow showing a majority for the 'leave' camp, with another volatile reaction in the opposite direction."
A half-dozen more surveys are expected to be released before voting begins.
Monday's snapback was remarkable. Stocks had fallen for six of the prior seven trading days through Friday's close as the "leave" side gained ground in polls, while government-bond yields in the U.K., Japan, Germany and Australia reached all-time lows.
Last week, bookmakers had estimated the odds of a vote to leave the EU at more than 40%. By Monday evening they had tumbled to 23%, according to betting exchange Betfair. As the odds of an exit fell, stocks, sterling and oil all jumped sharply, while safe government bonds and gold retreated.
To gauge the market, "on any given day, all you have to know is what the betting odds are," said Sebastian Raedler, head of European equity strategy at Deutsche Bank.
Assessing what the market will do after the vote is less straightforward. The elevated odds offered by betting markets for remaining in the bloc—they have stayed well above 50% even when the pro-EU side trailed notably in the polls—suggest many investors believe Britain will ultimately vote to stay. That, in turn, suggests a relief rally could be muted.
Monday's strong gains pulled many assets up but only served to reverse losses earlier in the month. The pound, for instance, is back where it was at the beginning of the year, having been down as much at 6% in February and 4.5% just last week.
Major European stock indexes remain down for the year. Stocks in Ireland rose 4.6% Monday, a sign that investors view a British exit as particularly troublesome for the U.K.'s closest trading partners.
If Britain does vote to leave, the market consequences are likely sharper and more complex. Most economists believe a separation from the EU would—at least temporarily—damp investment and trade with the U.K. Those advocating a Brexit say that, in the longer term, the U.K economy will thrive as it carves its own trade deals.
Yet the breadth of Monday's rally indicates that investors see a Brexit as possibly denting global growth, or at least sparking a downturn in risk appetite across the globe. The 7 ½-year-old bull market is fragile in a world where growth and inflation are scarce.
Outside the U.K., some investors say eurozone equities could suffer most from an "out" vote, if the decision emboldens growing euroskeptic parties throughout the continent.
"If the U.K. exits with a huge majority… then the European Union is critically at risk," said Philippe Ithurbide, global head of research at Amundi, Europe's largest asset manager.
Investors have pulled money out of European equity funds for 19 consecutive weeks ahead of the referendum, according to data from EPFR Global, while the Euro Stoxx 50 Volatility index recently surged to a one-year high.
Strategists at Deutsche Bank estimate European stocks could fall another 14% from current levels if the U.K. votes to leave.
But much market focus is on the pound. In part, that is because of the U.K's large current-account deficit, which was equivalent to 7% of gross domestic product in the final quarter of 2015, the biggest since record-keeping began in 1955.
A nation with a current-account deficit needs funds from abroad to close the gap. If investors are reluctant to hand them over, the value of sterling could decline dramatically.
The British Treasury said sterling could fall by 12% in the event of a vote to leave the EU, and analysts at HSBC predict a decline of up to 20%. Analysts say the reaction is likely to be asymmetrical. That means while the pound would probably rally in the event of a vote to stay, the rise wouldn't be as pronounced as the fall that would occur if the U.K. votes to leave.
But the trading picture could be complicated by central banks.
A sharp decline in the pound and a jump in haven currencies such as the Japanese yen and the Swiss franc could also trigger coordinated international currency intervention, dealers said.
"I think the initial reaction may be selling [of sterling], but there would be fluctuations in the case of an exit," said Kosuke Hanao, head of foreign exchange at HSBC in Tokyo.
As it comes down to the wire, the outcome of the referendum is difficult to gauge. Averages of recent polls point to a roughly 50-50 split, though two weekend polls suggested the remain camp regaining support. A phone survey by Survation gave a three-point lead to the pro-EU campaign, at 45% to 42%. An online poll by YouGov gave a one-point lead to staying in the bloc, at 44% to 43%. Both pollsters had an EU withdrawal leading in their previous surveys.
Another online poll by Opinium put the campaigns dead even at 44%, after showing the pro-EU vote two points ahead in its last poll.
"We're in this sort of frenzied period where Brexit is front and center," said Bob Doll, senior portfolio manager at Nuveen Asset Management. For investors outside Europe, "it's yet another of the signs that people are questioning globalization, foreign trade and open borders," he said.
—Kosaku Narioka contributed to this article.
Write to Riva Gold at riva.gold@wsj.com and Mike Bird at Mike.Bird@wsj.com
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