FTSE sterling respite unlikely to last
The government has in effect signalled that it can do to little to shield investors from the bouts of considerable volatility that policymakers themselves see as likely.
The government has in effect signalled that it can do to little to shield investors from the bouts of considerable volatility that policymakers themselves see as likely.
The announcement by Chancellor of the Exchequer George Osborne that both an ‘emergency Budget’ and his all but inevitable departure would be delayed, brought short-term reassurance for UK markets on Monday, limiting their declines.
Aside from what was essentially a reiteration of reassurances given by the Bank of England governor Mark Carney on Friday, Osborne was not able to provide any further certainty on key procedural questions (particularly when Article 50 will be triggered).
It is uncertainty surrounding such questions that are contributing to sterling’s softness. The Prime Minister has stated that he intends to leave the task of triggering Article 50 to his successor, and we don’t expect him to go back on that at the European Council summit this week. That leaves sterling with no more visible means of support than it had on Friday.
On top of that, the Chancellor conceded that “the volatility we have seen, and are likely to continue to see in financial markets”, is a significant challenge. Whilst there’s now no doubt that the government and the Bank of England are, as Osborne stated, “prepared for the unexpected”, it would make sense for authorities to wait for much more extreme conditions than those seen on Monday before deploying their well-telegraphed firepower.
More widely, political and economic uncertainty continues to have sufficient momentum to enhance jitters.
For the FTSE, we note that the option deal with the biggest open interest of any based on the benchmark index targets a fall to 5000 by December. Whilst the beneficial impact of a weaker pound for exporters, including those listed in the FTSE is more than theoretical, the impact of Brexit on sentiment will continue to be erratic and indiscriminate.
Note that short trades in our ‘Pro-Brexit’ model portfolio on banks, retailers, insurers and housebuilders—equity sectors sensitive to a UK/EU split—have rocketed. Most notably, a basket of housebuilders’ shares nosedived by another 36 percentage points between Thursday and Monday’s close.
That suggests even the strongest names in the sector were sold off sharply.
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From a technical basis, the FTSE 100’s destruction of long-term trends during its whipsaw last week increased the chance that 2016 lows which the index has remarkably evaded so far, will come back into play.
The weekly chart of Intercontinental Exchange’s FTSE Future index (below) shows it has entirely invalidated a potential bull flag that capped the end of a rising channel in place since at least July 2009.
The bearish ‘outside week’ was sufficiently unusual to prevent all but the most temporary rebounds taking place. That would suggest the index’s approach to the upper bound of either the long-term trend (white) or the shorter-term pattern flag (thin light blue) would bring a bearish outcome. Similarly, we would not expect values above last week’s close at 6103 to be sustainable.
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