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How Brexit Affected the Stock Markets

May 6, 2021
by Leon Marshall,

Article Recap

FTSE100 dropped 857 points in early 2018 on the back of Brexit uncertainty. The financial sector saw £1.2 trillion shift away from the UK since the vote.

Brexit, and its wide-ranging effects on the markets, has been an ever constant part of investors’ calculations since 2016. Now that the transition period has ended and a deal has been reached, what does Britain’s new place in the world mean for traders?

Like with any major market event, there are pros and cons. With increased uncertainty and volatility comes both risk and potential opportunity. The key for traders is to understand the underlying impact of Brexit changes on specific instruments. This lets them factor market movements into their trading plan.

It is important to remember that the effects of Brexit will be far-reaching and may take time to play out. Staying up to date on data releases, central banking reports and broader macro events is critical, as markets get to grips with our new relationship with the EU.

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In this piece, we’ll look at the Brexit effect on the stocks market, the FTSE100 and the wider impact Brexit is having on the economy.

How Brexit is impacting the pound?

Forex traders have kept a close eye on Brexit developments over the past five years. In late 2015, GBP was trading at a high of around 1.43 and then amidst growing uncertainty in the lead-up to the Referendum on June 23, 2016, fell to 1.23.

At some of the worst stages of negotiations, when markets fretted about the serious possibility of a No Deal exit, GBP sunk to just 1.07 USD. It rebounded to a high of 1.20 following the UK general election in December 2019, before negotiation uncertainty again dragged the pound down to a low of 1.06.

GBP has since made up some ground on the back of the greater certainty provided by a deal. Sterling is currently trading at around 1.15.

So, the story so far is one of increased volatility and relatively big reactions to key Brexit moves. But what can investors expect in the future? Remember that Financial Services are largely outside of the current trade agreement and this could see the City of London lose out. This would of course hit broader confidence in the UK economy.

How Banks Reacted?

Indeed, Barclays has shifted £166bn worth of assets from the UK to Ireland. At the same time UBS has shifted €32 billion out of the UK. The knock-on effects on confidence in both Forex and Shares markets could impact the pound and FTSE100.

From April, new checks will come into play between Northern Ireland and Great Britain. From July, the UK Border Operating Model will end and the full burden of customs declarations will become permanent. Both of these events could impact the pound and the value of specific Shares, as the stability of post-Brexit trade is key to market confidence.

A sign on the outside of London's Stock Exchange in the City of London

How is Brexit impacting the economy and stocks?

Because Brexit will complicate the UK’s relationship with the world’s biggest trading bloc, it is likely to have a broad impact across a number of key sectors and stocks. We have already touched on potential implications for Financial Services and there will be further effects on businesses in industries like fishing, food and agriculture, manufacturing, pharmaceuticals and more.

In fact, a recent LSE survey of European and US economists, found that 86% believe that the UK economy is likely to be at least several percentage points smaller by 2030 than it would otherwise have been.

The traders on the indices markets were not optimistic either. The FTSE100 has not been immune from Brexit disruption. The UK’s biggest Index has seen noticeable fluctuation driven by volatility, not least in early 2018 where it dropped from 7,778 to 6,921 on the back of Brexit trade uncertainty.

Fishing among the biggest news stories

The fishing industry has been hit hard already by Brexit. New trade barriers make exporting to the EU difficult for perishable goods. Likewise, new border controls and regulations will affect entire food and agriculture supply chains, from farmers to distributors and local exporters.

“Rules of origin” restrictions will also affect manufacturers across a broad range of segments, as fine-tuned and “just in time” supply chains need to evolve to fit a new operating model. This will likely impact trade volumes in the short to medium term and have knock-on effects on market confidence and the availability of goods.

The Wall Street Journal has also reported that the financial sector saw £1.2 trillion shift away from London between the 2016 Brexit vote and the end of 2020. This means the financial services sector and businesses within it could also face a period of adjustment. In a recent piece we examined the Brexit impact on an economy that’s far away from the UK in terms of geography – the Australian economy.

Trading on Brexit volatility

Trading around Brexit volatility means having a strong trading plan in place and a deep understanding of the instruments you trade. Always keep a close eye on your open positions and stay up to date with market moves and big Brexit related events. Stay up to date with our newsletter or visit our Trading Education Hub to learn more about managing your risk intelligently.

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