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.

Brexit market scenarios based on IG technical analysis

No-deal Brexit EU and parliament approve deal No Brexit
FTSE 100 7600 6700 6500
FTSE 250 17,000 20,700 21,500
GBP/USD $1.10 $1.35 $1.40
EUR/GBP £0.98 £0.85 £0.83
Housebuilders Expected to see sharp losses in case of no-deal, with detrimental impact on UK economy hurting demand until things settle. Deal would ease fears of a sharp economic slowdown, ramping up confidence and likely pushing the housebuilders significantly higher. Brexit still holds uncertainties though, so upside would be relative to type of deal struck A reversal of the vote via a 2nd referendum would amplify the upside seen through a Brexit deal, with the sector driving sharply higher
Financials Banks to suffer, as economic shock dents confidence and lessens demand for loans. Likely lower rates also hurts margins Sector likely to gain ground, particularly those domestically geared UK listed banks. Mortgage and business loan revenues likely to jump, while BoE outlook would point towards higher rates and thus improved banking margins Sharp gains likely for the sector, with economic activity to ramp up given a rise in business and consumer confidence. A strengthening pound would ensure that domestic banks outperform those with high foreign earnings.

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

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