By Gary Mullins
‘Brexodus’ wreaks havoc on UK markets
Negotiating a draft Brexit deal was never going to be plain sailing but the ructions across financial markets this week confirms just how significant the future EU-UK relationship is to investors. On Wednesday, Theresa May’s announcement of a draft Brexit deal led to a slew of senior cabinet resignations including Dominic Raab, Brexit Secretary, and Esther McVey, Work and Pensions Secretary. In his letter of resignation addressed to Mrs May, Mr Raab wrote that he ‘cannot in good conscience support the terms proposed’ in the 585-page draft. Mr Raab was one of many who cited the threat to the integrity of the entire UK should, as proposed, Northern Ireland fall under a different regulatory regime than the British mainland.
Mrs May now faces the unenviable task of garnering support for her proposed Brexit deal. The prime minister’s minority government is propped up by the Democratic Unionist Party, however Arlene Foster, the party leader, has been an outspoken critic of any Irish ‘backstop’ agreement. To add insult to injury, Eurosceptic conservatives, led by Jacob Rees Mogg, have called for a vote of no confidence in Mrs May, claiming that her proposal is a betrayal of the original referendum result.
Sterling suffered its biggest one day drop in two years on Thursday as uncertainty caused investors to retreat from the currency. UK equities and fixed-income markets also plummeted as frenetic investors attempted to digest the terms of the new deal against the backdrop of intense drama in Westminster.
The possible permutations of the Brexit negotiations range from a relatively close alignment with the continent to second referendum in which the original departure result could be annulled. Either outcome – or anything in between – is likely to inject volatility into global markets in the coming weeks and months.
EU equity indexes performed poorly this week as a result of Brexit-related uncertainty. The Europe-wide Stoxx 600 fell 1.1 per cent on Thursday with German and French stocks shedding 0.5 and 0.7 per cent, respectively. The Dublin bourse (ISEQ) suffered its worst one-day loss in almost three years, falling 8.3 per cent in Thursday’s trading. Business leaders have warned that the Irish economy could be the biggest casualty of a no-deal Brexit due to its reliance on trade with the UK.
Interestingly, the FTSE 100 – an index tracking 100 companies listed on the London Stock Exchange – ended the week flat. The reason is that, although listed in London, the revenue of the index constituents mainly comes from markets outside of the UK. The FTSE 250, which is a broader and more domestically-exposed index, fell 1.3 per cent on Thursday.
Elsewhere, the S&P 500 reversed a six-day consecutive fall to gain 1.1 per cent on Thursday. The index rallied amid optimism of an impending international trade truce at the forthcoming G20 summit. The tech-heavy Nasdaq Composite had a shaky week as more technology firms issued third quarter profit warnings. Nvidia, a graphics designer and computer chip producer, shed 16 per cent as its corporate earnings failed to hit expectations.
Mainland China’s CSI 300 and Hong Kong’s Hang Seng index ended the week down following the release of government data exposing a slow down in domestic retail sales.
Sterling fell almost two per cent against the dollar on Thursday – the biggest one-day drop in two years. Although the currency stabilised in Friday’s trading, investors are braced for further injections of volatility as the drama between Westminster and Brussels continues to unfold. The fall in price follows capital outflows from sterling into other assets. A fall in demand for a currency induces depreciation. The pound ended the week at $1.2793 to the dollar.
Elsewhere, the euro and the dollar ended the week up as investors withdrew from sterling markets and the excess funds moved abroad.
Despite a 2.2 per cent reversal on Friday, Brent Crude ended the week down 4 per cent at $68.10 a barrel. The international benchmark is languishing 23 per cent lower than the four-year high struck less than a month ago. Over the past fortnight, concerns about rising supply and a slowdown in global demand have caused oil prices to plummet. Individually, a surplus in supply and a deficit in demand cause asset prices to fall. The noxious combination has magnified the price shift and left commodity investors reeling.
The Week Ahead
Brexit developments will take centre-stage next week as Mrs May seeks to stave off a leadership challenge in the wake of the announcement of her proposed deal. A cabal of Eurosceptic Conservatives have signed letters of no confidence in the prime minister but few believe that they will manage to get the requisite 48 signatures to trigger a leadership challenge. Drama, discontent and discord are a certainty over the coming weeks and expect global markets to take a hit.
Businesses and consumers alike are poised for two of the biggest days of the holiday season – Black Friday and Cyber Monday. According to a National Retail Federation paper, this year’s holiday sales are expected to rise by 4.8 per cent year-on-year to a dizzying $720bn. Department store and retail profits have been squeezed in recent years following the explosion of online shopping. However, a strong US job market and higher consumer sentiment have revived stores, otherwise suffering from a dwindling customer base.
Photo provided by FT
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