As the U.S. grapples with its trade war with China, things aren’t going too smoothly across the Atlantic either. It should come as no surprise to American investors that the uncertainty surrounding the Brexit process has weighed heavily on British growth, with the pound continuing to lose value. However, it seems as if the EU and the U.K. may be coming closer to reaching a resolution. The deadline is Oct. 31, so a deal needs to be worked out soon.
A green light?
It was an extremely busy day in the market on Friday with the FTSE 250 up almost 3% off the back of the most positive Brexit deal news in months. The European Commission announced it has given the green light to lead Brexit negotiator Michel Barnier to pursue detailed talks for a new deal. In addition to stocks, the pound reacted very positively, at one point reaching a rate of $1.26 against the U.S. dollar, the currency’s biggest surge since the referendum back in 2016.
The FTSE 100 reaction was somewhat more subdued, with the index up just 0.5% as of the time of writing. The disparity between the larger and smaller capitalization companies can be explained by the fact the FTSE 250 as a class of companies has significantly more exposure to the domestic British economy than its larger cousin, which is more internationally-facing.
A no-deal Brexit is widely acknowledged to be a "lose-lose" scenario for everyone involved, but especially for the U.K. Accordingly, anything that makes such an outcome less likely is interpreted as extremely positive for stocks.
A boost for the government
Additionally, the prospect of a satisfactory resolution to the Brexit crisis makes a Jeremy Corbyn-led Labour government significantly less likely. Corbyn’s strongly socialist leanings have made business leaders extremely worried about the idea of him becoming prime minister. In the past, he has spoken out against banks and other large financial institutions. For instance, he proposed a "Robin Hood" tax that would levy a payment on stock, bond and derivatives trades, ostensibly in order to curb high-frequency trading.
Not totally in the clear
It must be stressed that this development does not mean a deal will definitely be made. After all, Prime Minister Boris Johnson’s predecessor, Teresa May, had secured a deal that was then voted down multiple times by the British Parliament. And it remains to be seen whether this new deal will be significantly different from the old one. Johnson may attempt to sidestep the legislature, but such tactics have elicited stiff legal opposition in the past. Still, this is the best news that investors have had in a while. Only time will tell whether the outlook will improve.
Read more here:
- Seth Klarman: Venture Into Complexity
- 3 Important Market Indicators Investors Should Pay Attention To
- Peter Lynch's 6-Step Investing Checklist
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
