brexit - cloudinaryjune 23: in a referendum on whether to leave the eu, a majority of voters (51.9%)...
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BREXIT: THE PROLONGED MOVER & SHAKER OF MARKETS
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IntroductionFor over two years, developments related to Brexit have moved the financial markets. While the high volatility has created attractive trading opportunities, the uncertainty has also kept some traders on the sidelines. To take advantage of these historical events as they continue to unfold, traders need to know what to expect.
This guide is written to specifically help traders navigate their way around Brexit and give an understanding of how it has impacted the markets in the past. It also dips into where the market stands today, which upcoming dates to look out for and what to expect going forward. The guide begins with the latest events and happenings and also covers the market response to earlier Brexit events. To help traders get a perspective and stay abreast of the dynamic and shifting nature of this unique event, the guide will be updated regularly to include the latest events.
Brexit: What Happens Next? 3
Recent Events & Their Impact on the Markets 5
A Peek into the Historical Market Movements Triggered by Brexit 7
The Brexit Saga Unfolds 8
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Brexit: What Happens Next?Pro-Brexit Boris Johnson won the race to become the next UK Prime Minister, after Theresa May’s resignation on May 24. This has strong implications for the financial markets
1 The Developments Since Then
• Hard-line Brexiter Boris Johnson had campaigned on his commitment for the UK to exit the EU without a deal.
• PM Johnson handed Michael Gove the responsibility to prepare for a no-deal Brexit.
• The UK government said an additional cash injection of £2.1 billion was being set aside to prepare for a no-deal Brexit (doubling the amount committed earlier this year).
• The Conservative Party lost a special election, reducing Boris Johnson’s working majority in Parliament to just one seat.
2 From Uncertainty to Downright Scary
There has been growing concern over UK exiting the European Union (EU) without a deal on October 31, 2019. With the Brexit date coinciding with Halloween, the markets are drawing an analogy, amid fears of Brexit turning into a nightmare.
To add to the uncertainty, there is speculation that Boris Johnson may want a general election soon in a bid to increase his majority in Parliament from the current one seat. This comes at a critical time for UK. Continuing its bearish momentum, the British Pound went on to hit its lowest level against the US Dollar in 31 months on August 12, 2019. The Pound has been under pressure due to no-deal Brexit jitters and fears of recession in the UK. The questions now are has the Cable seen the worst of it, will it recover or will it continue to slide?
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3 How Might the Markets Respond?
Impact on the Pound
The British Pound has endured pressure since the UK voted in favour of Brexit in 2016. Any statements by Prime Minister Johnson around the Brexit rhetoric and chances of a no-deal scenario could continue to exert pressure on the Pound. If Parliament calls for and wins a no-confidence motion leading to another general election, then the Pound may suffer the consequences
Impact on the Footsie
The declining British Pound has already propelled the internationally exposed FTSE 100 higher throughout the year. This is because the FTSE comprises of companies that export most of their goods or services and, therefore, stand to benefit from a devaluation of their home currency. The FTSE 100 could continue to be supported by a weak Pound.
While domestically focused businesses are worried about a no-deal Brexit, they appear encouraged by Johnson’s stance on loosening fiscal policy slightly and increasing public spending. This position may create a positive environment for companies and could boost their share prices, lending support to the FTSE 100 and FTSE 250. More statements of this nature from the government may help these indices.
Important Dates Ahead
The House of Commons returns from their summer recess.
Conservative Party conference will be held.
EU summit will be held, the last one to be attended by the UK before their departure.
This is by far the most important date. It is when the UK will formally exit the EU, possibly without a deal being in place.
September 3:
September 29 to October 2:
October 17-18:
October 31:
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Recent Events & Their Impact on the MarketsIt is not often that we are aware of living in a significantly historical time, but right now, with Brexit, there’s no denying that is the case. Let’s look back at some of the recent events surrounding Brexit and how they moved the markets. Valuable current insights like these give a unique perspective that may help with developing strategies for the upcoming Brexit events.
May 24: Theresa May resigns as Conservative Party leader.
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The Market Verdict
The announcement of Theresa May’s resignation didn’t shake or move the market, as it was widely anticipated. The British Pound spiked against the US Dollar in early trading sessions, before paring some gains towards the latter sessions.July 24: Boris Johnson forms the government and becomes the UK Prime Minister.
The UK markets, especially traders long on the Pound, were hoping for a hard-line Brexiter to be named as the next Prime Minister. Boris Johnson was greeted with a rally of the British Pound. However, as the UK PM’s rhetoric on Brexit toughened and businesses started fearing a higher probability of a no-deal scenario, the Pound took a tumble. On July 28, the Pound nosedived to a 28-month low against the US Dollar to reach $1.2242. The Pound also plummeted against the Euro to €1.1004.
British Pound Falls Against the US Dollar on July 28
Source: ADSS MT4 Platform (GBPUSD, H1 Chart)
British Pound Falls Against the Euro on July 28
Source: ADSS MT4 Platform (EURGBP, H1 Chart)
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A Peek into the Historical Market Movements Triggered by BrexitHere’s a brief summary of the key issues and events that have played out so far and how these developments have impacted the markets.
Not surprisingly, the starkest impact of Brexit developments has been on the British Pound.
Pound performance since the EU referendum Exchange rate with US Dollar
Source: https://www.bbc.com/news/business-46862790
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Let’s take a more detailed look at the performance of the Pound and other currencies as well as how other markets reacted.
The Brexit Saga UnfoldsJune 23: In a referendum on whether to leave the EU, a majority of voters (51.9%) support Britain’s exit as a Member State. This comes to be known as “Brexit”.
June 24: David Cameron resigns as UK Prime Minister.
July 13: Theresa May forms a government. David Davis is appointed Secretary of State for Exiting the EU to oversee withdrawal negotiations.
The Market VerdictAs news of the UK voting in favour of Brexit sent shockwaves in the markets, sparking widespread panic. The global financial markets came spiralling down. The downturn was sudden, sharp and with a high level of volatility.
The market response was one of the most dramatic and terrifying trading sessions in over a decade.
Experts worldwide expressed concern around prospects of the UK economy after Brexit. For instance, Moody’s lowered its outlook on Britain’s credit rating from stable to negative. The renowned rating agency said that the UK referendum would have negative implications for Britain’s economic growth, while warning of softer public finances and a “prolonged period of uncertainty” for the nation. Such reports didn’t do well for market sentiment.
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2016
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The British Pound recorded its biggest one-day selloff since World War II, plummeting more than 8% against the US Dollar. The Pound maintained its downtrend over a prolonged period, losing nearly 20% against the US Dollar in six months since the UK vote.
Source: ADSS MT4 Platform (GBPUSD, Weekly Chart)
The FTSE 100 started the day sharply lower. It gained through the course of the day, with a rise in stocks of companies with high exposure to earnings outside of the UK. However, the gain could not wipe out the massive loss at the start of the trading day. The German 30, French 40 and Eurostoxx declined through the day.
Source: Bloomberg (FTSE 100 Index: 23rd – 24th Jun 2016)
Traders gravitated towards safe-haven assets, resulting in a sharp rise in prices of precious metals. The price of gold rose 5% during the day. The flight towards safe-haven options also resulted in a rally in gold and silver stocks (like that of Randgold and Fresnillo).
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Source: The Times
March 29: The UK Prime Minister formally triggers Article 50 by writing to European Council President Donald Tusk.
This is when the countdown began, spanning a period of two years. The date for the UK’s formal exit from the EU was set as March 29, 2019.
2017
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The Market Verdict
The Pound weakened through the course of the day. This was not only due to the then UK PM Theresa May triggering Article 50. Prospects of further rate hikes by the US Federal Reserve also exerted pressure on the Pound. The EUR/GBP was choppy throughout the day, with the Pound being on a general downturn against the Euro.
The London Stock Market faced a day of high volatility, with the FTSE 100 recording gains early in the trading session, then falling sharply only to rebound and end the day in positive territory. The weakness of the Pound helped the FTSE 100.
The DAX climbed to a two-year high and came close to its record high of 12,392 reached in April 2015. The French 40 and US stocks also rose.
Source: ADSS MT4 Platform (EURGBP, H1 Chart)
June 8: General elections held in the UK. The Conservative Party forms a minority government with a confidence-and-supplyarrangement with the Democratic Unionist Party (DUP) of Northern Ireland.
June 9: Brexit negotiations begin.
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British Pound Plummets Against the US Dollar
Source: ADSS MT4 Platform (GBPUSD, H1 Chart)
The forex market went into a frenzy, driven mainly by uncertainty, but also the fear of Britain being unable to negotiate a Brexit deal. The Pound plunged to an eight-week low against the US Dollar and nosedived to a seven-month low against the Euro.
British Pound Takes a Hit Against the Euro
Source: ADSS MT4 Platform (EURGBP, H1 Chart)
The FTSE 250 came under pressure, as this index comprises of countries more focused on the domestic market. UK’s blue-chip stocks rose, with the Conservative Party not winning a majority. This took the FTSE 100 higher by over 1%. DAX and CAC also rose, but by a lower percent.
The Market Verdict
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FTSE100 Responds to UK Elections FTSE250 Responds to UK Elections
Source: https://www.express.co.uk/finance/city/814915/Election-2017-FTSE-100-june-9hung-parliament-conservative-result-UK-pound
July 8: Davis resigns as Secretary of State for Exiting the EU. Dominic Raab is appointed as his successor.
July 9: Boris Johnson resigns as Foreign Secretary.
The Market VerdictThe global financial markets didn’t really respond to these developments. This was partly because speculations around these resignations had already been doing the rounds. Also, the US-China trade wars had taken centre-stage and traders were concerned over the impact on the world’s two largest economies.
Boris Johnson’s resignation did support the British Pound, which recorded gains against both the US Dollar and the Euro.
GBP Rises Against the Euro on July 9
Source: ADSS MT4 Platform (EURGBP, H1 Chart)
2018
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British Pound Rallies Against the EUR on March 21
Source: ADSS MT4 Platform (EURGBP, H1 Chart)
November 14: Brexit withdrawal agreement is published.
November 15: Raab resigns as Secretary of State for Exiting the EU. Stephen Barclay replaces Raab.
November 25: Other 27 EU member states endorse the Brexit withdrawal agreement.
The Market VerdictTraders of UK financial assets were nervous. Everyone seemed to be talking about the consequences of a no-deal Brexit.
The British Pound fell by around 2% against both the US Dollar and the Euro on November 15. The FTSE 100 was severely impacted by the pressure on Royal Bank of Scotland, which closed the day almost 10% lower. The Footsie recovered somewhat to close the day flat. Apart from the Sterling weakness, the FTSE 100 was also boosted by gains in mining and oil company stocks.
March 14: The House of Commons votes to seek permission from the EU to extend Article 50 and agree on a later date for Brexit.
March 20: The UK Prime Minister writes to European Council President Donald Tusk, requesting the date to be extended to June 30, 2019.
The Market VerdictThe British Pound recovered after the UK sought approval to delay Brexit. The GBP rallied versus the Euro. The FTSE 100 declined, but that was on fears of a global slowdown.
April 2: The UK Prime Minister announces a request to further extend Article 50.
2019
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The Market VerdictThe British Pound declined, albeit only slightly, against both the US Dollar and the Euro. The FTSE 100 ended the day with a gain of 1%. European markets also gained on the day, including a rise in the DAX and CAC.
FTSE 100 Rallies in April
Source: Bloomberg (FTSE 100: Mar-Apr 2019)
April 10: The UK and EU27 agree to extend the date to October 31, 2019.
From March through July, the British Pound has remained volatile against the Euro and the US Dollar, with a general downtrend.
EUR/GBP Movement from March to Present
Source: ADSS MT4 Platform (EURGBP, Daily Chart – from March to present)
GBP/USD Movement from March to July
Source: ADSS MT4 Platform (GBPUSD, Daily Chart – from March to present)
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Some Important Terms Explained
Article 50 of the European Union
Article 50 of the Treaty on European Union was enacted by the Treaty of Lisbon on December 1, 2009. It details the procedure for a member state to withdraw voluntarily from the EU.
The EU
The European Union is a group of 28 countries. The region operates as a cohesive economic and political block.
No-Deal Brexit
A scenario in which the UK would leave the EU without any formal agreement and would need to rely on the international trading rules laid out by the World Trade Organization (WTO). The WTO is a global organisation that sets out general trading rules among nations. They don’t take into account country related specificsmeaning that the UK is likely to be better served with a deal with the EU that is more aligned to their requirements and specifics
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