FTSE 100 outlook: how will the Brexit outcome impact the FTSE 100?
With the Brexit process reaching its final stages, the FTSE 100 looks primed for significant volatility dependent upon each possible outcome.
FTSE 100 affected by trade war and Brexit
The FTSE 100 has shown a general lack of direction throughout the past two years, with the sterling devaluation boost seen in 2016 failing to persist in the nearly three years that have followed. For FTSE 100 traders, they are caught trading a market that has two hugely influential geo-political events playing out in tandem.
US-China trade relations have the propensity to move all global stock markets, and the FTSE is no different, with much of the flow out of equities seen in the UK mimicking the global flow into bonds and treasuries in response to growing recession fears. However, the UK is different from the other markets, with the uncertainty around Brexit also adding huge second source of future volatility and uncertainty.
The decision to leave the EU came as a shock to most, with the widely criticised decision to cut rates immediately after the vote highlighting the then-presumed notion that the UK economy will suffer hugely over the short term.
While we have seen economic weakness in the UK, the recent gross domestic product (GDP) print of -0.2% remains the only negative reading since the referendum, despite the simultaneous slowdown seen worldwide. However, we are now at the business end of this Brexit process, and while we could see another extension, we are ultimately seeing the willingness to kick the can exhausted in both sides of the English Channel. With so many potential pathways from here, it is difficult for traders to correctly predict exactly how things are going to play out. However, the outcomes ultimately are limited, even if the pathways to the outcomes can be varied in both nature and timeframe.
Bear in mind the FTSE 100’s inverse correlation with GBP
When looking at the FTSE 100 in relation to each of these outcomes, it is always worthwhile noting that the direction of trade can often seem counter-intuitive given the inverse correlation with the pound. Looking at the referendum as an example of how the FSTE can move, the decision to leave the EU was perceived as being bad for the UK economy, yet we saw huge gains for the FTSE 100.
With the FTSE 100 consisting of a substantial number of internationally focused firms, a sharp rise in the pound comes to the detriment of earnings that are earned abroad and converted into sterling. And vice versa. Thus, what is perceived to be good for the UK economy is typically negative for the FTSE 100, and more positive for the FTSE 250 which is less internationally geared.
FTSE 100 strategies: possible Brexit outcomes
Now let’s take a look at the potential Brexit outcomes and how they could move the FTSE 100.
How to trade the FTSE 100 in a no-deal Brexit
While Brexit was campaigned for under the premise of a deal with the EU, a no-deal outcome appears to be increasingly likely given the rise in prominence of both the ERG and Brexit party. For the most part, this is the worst outcome for the pound, and thus it would likely be the best outcome for the FTSE 100 given the substantial weakness we would see for sterling
Looking at the gains seen in the FTSE 100 following the referendum, we saw 10% upside in the space of a week, which stood around 20% within six-months of the result. However, those moves were in response to an environment where we would see a deal eventually struck with the EU.
With the FTSE 100 currently trading around the levels seen six months after the referendum result, there is a strong chance that we will see substantial upside for the FTSE 100 in the event that there is a no-deal Brexit. With that in mind, it would come as no surprise to see the FTSE 100 breach the 2018 peak of 7903 in the aftermath of a no-deal Brexit, with the process leading to that event also likely to drive the pound lower and FTSE 100 higher.
How to trade the FTSE 100 in a soft Brexit
The detail of any such deal would of course impact the degree of movement within the markets, yet for the most part we have seen the possibility of a no-deal Brexit dictate price action.
Thus, in the event we see a no-deal Brexit averted, there would likely be a substantial relief rally for the pound. The economic outcome for the UK would still remain uncertain given the upheaval that will still take place in response to a removal from a number of EU structures. However, FTSE 100 traders are likely to see weakness play out for the index as internationally focused firms lose ground off the back of sharp sterling gains.
How to trade the FTSE 100 with no Brexit
It still remains to be seen whether the UK is going to leave the EU, with the likes of the Labour leading a coalition to fight back against the current pathway. Could that turn into a referendum that ultimately reverses the original vote? Certainly. Although this seems the least likely of the three outcomes.
Should such an event occur, we would expect to see huge reversals of the moves seen in the wake of the original vote. The UK economy will have taken a hit, and there would still be fears that the Brexit party are going to infiltrate UK politics until it happens.
However, it would be expected that the pound would regain a huge amount of ground, while the FTSE 100 in turn slumps heavily. Given the 20% rise seen in the six months following the original referendum result, it would not necessarily surprise many to see 10%-15% of those gains reversed in the event that the UK decides to go back on that decision.
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Trading around Brexit
Find out how the UK’s exit from the EU continues to affect traders, and discover:
- The unique opportunities in a ‘hard’ and ‘soft’ Brexit
- The markets you should be watching
- Everything that’s happened so far
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