UK assets show resilience despite vote of no confidence
Yet despite the prospect of more domestic political chaos, UK assets are not showing signs of strain. The pound is looking resilient, holding onto gains from last night whilst gilts, a traditional safe haven investment sold off. The FTSE has been weaker, however that is to be expected given the stronger pound and the inverse relationship between the FTSE and sterling.
There are several reasons why the markets are trading at these levels:
1. Trades are taking an optimistic view of Theresa May’s historic defeat last night. The deadlock is so apparent in Parliament and the result so dire that traders view the chances of a no deal Brexit as greatly reduced. Extending Article 50 and /or a softer version of Brexit, or no Brexit at all are the most viable options now, in the eyes of the market. These are all more beneficial outcomes for the pound and domestic stocks than a no deal Brexit.
2. The market is confident that Theresa May will win tonight’s vote of no confidence. The DUP and Tory rebels have pledged their support to Theresa May. They may not be in favour of her Brexit deal but this isn’t to say that they want a Labour government. Current market levels suggest that traders are comfortable that a win is in the bag for the PM. This confidence is supporting the pound and domestic stocks on the FTSE.
3. Whilst Brexit has been grabbing the headlines trader’s reaction to inflation data was muted. Inflation dropped to 2.1% in December, down from 2.3% in November as expected. Core inflation increased to 1.9% yoy in December, ahead of the 1.8% forecast. Whilst the numbers didn’t ruffle any feathers, the stronger core inflation reading will be quietly offering some support.
If Theresa May loses?
With confidence riding high that Theresa May will see off her rival, the prospect of Theresa May losing the vote tonight is not being priced in. This means that should Theresa May lose, then the reaction could be severe. Developments which add further uncertainty to the already complicated Brexit picture will weigh on demand for the pound. An immediate sell off in the pound would be expected. Sterling would continue to sell off targeting $1.20. The weaker pound could boost the FTSE thanks to the high proportion of multinationals on the FTSE which benefit from the prudential exchange rate.
If Theresa May wins?
The broad assumption is that Theresa May will win. The win is therefore priced into the markets. The market reaction should be limited in the case of a win. Instead traders will quickly look towards discussions surrounding Plan B, which will drive volatility.
Theresa May has until 21st January to put forward Plan B. But with uncertainties going nowhere fast and the clock ticking, business and consumer confidence will remain downbeat. This will keep pressure on the pound and domestic stocks such as house builders, British banks and leisure stocks. Only news of a second referendum or an extension of Article 50 could lift sentiment further from here.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.
ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.
City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.
The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.
The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.
The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
© City Index 2024