‘Hopes Have Been Dashed’: Market Reaction to Brexit Developments

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The weekend’s developments in the U.K.’s path to exit the European Union have left equity and sterling investors with yet more uncertainty, with outcomes ranging from a delay, a chaotic departure or -- if Prime Minister Boris Johnson succeeds in his latest plan -- an exit with a deal on Oct. 31.

“Financial markets closed last week on an optimistic tone with hopes of resolution and certainty to the Brexit outlook. These hopes have been dashed,” said David Page, Senior Economist at AXA Investment Managers. The pound may see “knee-jerk weakness” on Monday, according to AMP Capital Investors Ltd., while the U.K.’s domestically-exposed FTSE 250, which gained 5.2% over the past six trading days, will also be in focus.

Still, losses for the pound and U.K. domestic equities may be limited as a no-deal exit looks less likely, according to Credit Agricole strategists, who recommend using sterling dips as a buying opportunity.

With another dramatic week in U.K. politics ahead, here’s what market participants are saying about the latest developments.

Alberto Tocchio, Colombo Wealth SA

• “We are back to square one unfortunately and the market is not going to like it on Monday. The pound will fall back after recent strength and European markets should lose at least 1%.”
• “On the positive side, Chinese top trade negotiators said that talks with U.S. are making progress and both sides are working toward a partial trade deal. This might partially offset the negative side effect of no-Brexit deal on Monday.”

David Page, AXA Investment Managers

• “Gains in sterling, mid-cap equities and U.K. gilt yields look likely to face an early retracement over the coming week. Insofar as broader global assets, including U.S. Treasury yields had also moved on these developments, we can expect to see some retracement of these moves as well.”
• “Volatility associated with Brexit uncertainty looks set to remain elevated over the coming two weeks at least. However, we continue to view the prospect of a “no deal” exit on 31 Oct. as unlikely and an eventual extension to Article 50 still, on balance, appears the most likely outcome.”

Oliver Harvey, Deutsche Bank

• “The next focus for the market will be votes next week on the legislation needed to implement the government’s Withdrawal Agreement. There will be a second opportunity for MPs to get the deal done. We retain our constructive outlook on the U.K., and long sterling and short U.K. real yield recommendations.”

Joshua Mahony, IG Group

• The Letwin vote has been seen as a proxy for the meaningful vote on Johnson’s Brexit deal, so “markets are understandably treating this result with disappointment.”
• “It has been clear that there is no majority in Parliament for anything other than opposition for a no-deal Brexit, and thus it is evident that Brexit could yet only occur once we have seen a general election. For traders, the hope of greater certainty has been dashed, with Parliament looking ever more likely to push for an extension into 2020.”

Stephane Barbier De La Serre, Makor Capital Markets

• “The (weekend’s) developments by no means imply that Brexit will necessarily not happen by Oct. 31. It just strongly increases the odds of further status quo aka uncertainty, the thing markets just hate the most.”
• He expects in coming days U.K. stocks to “brutally relinquish most of their recent gains”, with FTSE 250 down about 5%, while FTSE 100 to be more or less unchanged, cushioned by exporters’ negative correlation with the pound.

--With assistance from Kit Rees and Macarena Munoz.

To contact the reporters on this story: Sam Unsted in London at sunsted@bloomberg.net;Ksenia Galouchko in London at kgalouchko1@bloomberg.net;Joe Easton in London at jeaston7@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Blaise Robinson

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