Markets pricing in ‘Hard Brexit’ as Theresa May delivers vision

January 17, 2017

Sterling has continued to slide through the week as the market begins to fully price in a “hard Brexit”. The pound has now fallen about 20% against the dollar since the referendum vote. Rhetoric coming from Theresa May indicates that immigration policy will overpower the desire to stay in the EU single market and customs union. Given the government wants to keep details to a minimum, to ensure a stronger negotiating position, it is difficult for investors to anticipate the future with any confidence. Again this is likely to continue to result in market swings as more information is revealed.

However, the weak pound and additional positive economic news has driven the UK stock market higher. The FTSE 100 has now risen for 15 consecutive days, continuing on from the strong end to 2016. There is an increasing correlation to movements in the FTSE 100 and the pound as analysts focus on the value of overseas earnings. Currently, equity investors are happy to look through negative news, driving down volatility. However, there are plenty of catalysts that may cause a change in sentiment.

On Thursday US President-elects’ first news conference since being elected tested markets and drove the dollar lower. Many of the key pro-growth policies that bullish investors had been looking for were not discussed in depth. Furthermore, the focus was primarily on conflicts of interest, nepotism, protectionism and market intervention as well as links to Russia. Biotechnology companies took a hit during the conference, as comments over the lack of competition in the sector pointed at potential regulation over drug pricing. This came as a mild surprise, as Hilary Clinton was always seen as the negative candidate for the pharmaceutical sector. It is likely that this will only be the first in a long series of unexpected moves that will come to light over his term as President, leaving an air of uncertainty over equity markets and investment decisions.

 

Index Open Close Change % Change
FTSE 100 7210 7337 127 1.8%
S&P 500 2276 2274 -2 -0.1%
Dax 11599 11629 30 0.3%
Cac 40 4909 4922 13 0.3%
Nikkei 225 19454 19287 -167 -0.9%
UK 10 Year Gilt Yield 1.353 1.35 -0.003 -0.2%

 

UK inflation, unemployment and retail sales data for December are released over the course of the week. US inflation data is released on Wednesday.