Pegler’s market report – 28.06.16: A step into the unknown

As published in the Brighton Argus (28.06.16) Business on page 21 under the title Pegler’s Market Report:

A step into the unknown

The momentous decision by the UK to vote to leave the European Union, popularly known as Brexit, is a step into the unknown. At this stage the longer-term consequences for the markets, economy and British and European politics are difficult to predict. The country is likely to enter a long period of negotiation around the terms of the exit.

In the shorter term we can expect share, bond and currency markets to be extremely volatile – not just in the UK but globally. In the days leading up to the referendum, sterling and global stock markets strengthened in the mistaken belief that the UK would opt to remain in the EU. Now, as markets readjust to the new reality we are likely to experience further turbulence.

The blue chip FTSE 100 actually ended the week up over 2pc despite a tumultuous day of trading which saw it plunge as much as 8.7pc when the market opened on Friday. Many of these larger companies, which earn revenue from overseas businesses, will benefit from sterling’s depreciation.

The FTSE 250, which is considered a bellwether of the UK economy as a whole because it contains more UK-focussed companies, ended the day down 7.2pc on Friday – its worst day since Black Monday. The fall wiped £25bn off the value of the index in all and almost a quarter off the value of some stocks.

The turnover was £14.2bn, which is the highest since Lehman Brothers crashed on September 19 2008, when the turnover was £22bn.

Shockwaves from the UK’s decision to vote to leave the European Union were felt in across the world, as bourses in Europe and the United States suffered historically bad trading days. The German DAX was down 6.8pc, France’s CAC market was down 7.9pc and in Madrid, the Spanish market ended the day down 12.7pc, its worst fall ever.

Meanwhile, the pound slumped to its weakest level in more than three decades, sending investors fleeing to the “safe haven” of gold, which jumped to a two-year high.

Moody’s, the influential rating agency has already downgraded the UK’s credit outlook. Uncertainty is the big driver behind the decision. Such uncertainty has real consequences – spending decisions by households and firms could now be delayed or put on hold. That will have an impact on confidence and that is likely to have a knock on effect to growth.

By David Pegler, Brighton Capital Management