Weekly market recap – Rigmarole of renegotiations

Positive news for UK-Ireland Brexit negotiations elicits UK equities comeback.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 11th October 2019

If you have noticed someone in the office has been in an uncharacteristically happy mood since last week, spare a thought that they may have won £170 million. According to the Sunday Times Rich List (2019), the anonymous UK-winner of the EuroMillions jackpot has been catapulted up the rankings and will now sit comfortably ahead of singers like Ed Sheeran and Adele.

UK domestic equities also hit the jackpot Friday as unexpectedly positive news emerged following a meeting between the UK Prime Minister and Irish Taoiseach. Asset class returns in sterling and local currency are below; with the UK and the European Union now moving into eleventh hour negotiations, UK domestically focused assets reacted aggressively to the rising probability of a withdrawal agreement.

Table 1: GBP total returns

   

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

The developments mentioned above follow months of political toing and froing from all sides of the debate in which pundits have shifted market sentiment by offering opinions on just about every conceivable outcome and development. This has ranged from the Conservative Party leadership election over the summer to the ins and outs of how the UK’s unwritten constitution comes together (who knew the obscure Parliamentary process of prorogation would have entered the mainstream lexicon).

The most recent episode in the ongoing saga ended with a 3-hour meeting between the UK and Irish leaders, which ultimately saw both sides give enough movement in their positions to warrant further, more substantive negotiations. With broad consensus recently being that there was no possibility that negotiations regarding the withdrawal agreement could be reopened, the constructive tone from the Prime Minister and the Taoiseach was met positively by sterling traders. A chart of the pound’s path in the latter half of the week is shown below.

Chart 1: A series of positive events for sterling saw the currency move significantly against the US dollar as investors repriced the probability of the two sides coming to a revised withdrawal agreement

Source: Bloomberg

Sterling hasn’t been the only beneficiary of this development. Both UK equities and UK government bonds saw moves reflective of the probability of a no deal Brexit receding. For instance the FTSE 250 index, whose more domestically focused constituents have remained unloved in recent years due to their sensitivity to the UK economy, rose 4% on Friday alone. The move reflects that a ratified withdrawal agreement may unlock large amounts of business investment currently put on hold due to uncertainty around the UK-EU future trading relationship.

Chart 2: The more domestically orientated FTSE 250 outperformed the larger-cap FTSE 100 as it had its best day in since May 2010, rising 4% on hopes of a renegotiated withdrawal agreement

Source: Bloomberg

Since Article 50 was triggered and the countdown to the UK’s departure from the European Union started, sentiment towards who exactly has the upper hand in negotiations has oscillated. With only days left now until the current negotiating deadline is up, there runs a risk that this is indeed just another chapter in the never ending divorce and that an extension to the negotiating period is all but inevitable. Nevertheless, I’m sure everyone is still keenly refreshing the news for breaking developments.

STAT OF THE WEEK: 2.6% and 33% – renewables share of UK electricity generation in the years 2000 and 2019 respectively (BEIS).

Data correct as at: 11/10/19

About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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