FTSE 100 Rises As Investors Eye A Smooth Exit from the EU

The London stock market on 11 October soared higher after investors looked optimistic that the United Kingdom and the European Union might be able to reach an agreement on Brexit. The FTSE 100 index, which is a share index that tracks 100 groups with the biggest market capitalisation that are listed on the London Stock Exchange, opened lower before rising by around 61 points from its low, while the FTSE 250 index, which tracks the next 250 biggest companies, opened the day in green and was quoting 2.5 per cent higher than its previous day closing. The market took encouragement from the meeting between the British Prime Minister Boris Johnson and his Irish counterpart Leo Varadkar, who claimed that a pathway to a deal on Brexit could be seen.

The two country heads met on 10 October to seek a resolution to the biggest impediment to a Brexit deal – the Irish backstop plan – and the leaders appeared to make headway. While Mr Johnson was adamant Northern Ireland must remain part of the UK customs’ area, the EU held to its position that it must remain inside the EU customs union to protect the interests of its member. Indicating that Mr Johnson might now be open to consider letting Northern Ireland be a part of the EU customs union and thus shift his red lines, Mr Varadkar spoke of very positive and very promising talks with the British PM and claimed that a withdrawal treaty could be agreed before the end of the month.

The market sentiments got a further boost when the EU Council President Donald Tusk said that he had seen signals that a fresh agreement can be reached between the two sides, though he added that the UK had not still proposed a workable, realistic proposal. Amid the widespread pessimism amongst both the parties in the follow up to the latest meeting, Mr Tusk said that even the slightest chance must be used but warned that they are short in time and there is no guarantee of success. To see if the new enthusiasm can lead to detailed negotiations, technical talks were taking place in Brussels as Michel Barnier, EU chief Brexit negotiator, was holding talks with Stephen Barclay, Brexit secretary. Experts said that later on Friday, details of the possible compromise could start to emerge, which can give strong indications of the possibility of a deal before the latest deadline of 31 October.

Over the past two trading sessions, the pound has edged higher by 3 per cent. On 10 October 2019, the beaten-down currency, amid hopes for a Brexit deal, was eyeing its biggest one-day gain in seven months as it extended its gains against the US dollar. It climbed by 1.9 per cent to hit its highest level in two weeks, after touching record lows in recent times as the confidence of investors in the economy of the country eroded. Many consider it as a near-perfect asset to gauge the mood of investors, as the bond yields have been near record lows around the world. However, a deal with the EU would send it soaring and prove to be a turnaround point after the currency continued its downward trend with more vigour.

In a major reversal of fortunes for the much beaten-down market, the FTSE 100 share price reversed earlier losses, helped by a rally in blue-chip financial stocks and housebuilders. An index JP Morgan that tracks UK-listed companies which primarily earns their revenue from the country was on track for its best day since the basket was created nearly three years ago as the index was up by more than 4.5 per cent, while the FTSE 250 index was on course for its best day since January. The Dublin bourse (The ISEQ 20), which is often considered a barometer of Brexit sentiment, was up by 3.34 per cent and was inching towards the year high recorded in April.

Optimism that the UK would be able to leave the EU in an orderly fashion after three years of chaotic negotiations, which were marked by various ups and downs gave investors a sigh of relief and helped the relatively domestic-focused FTSE 250 index higher. However, as sterling got a boost from the positive development, the exporter-heavy FTSE 100 missed out on a trade sentiment-induced rally in global stocks and lagged the domestically-focused mid-caps, though companies with exposure to the local economy were trading at a premium over the FTSE 100 for the first time since May. At the time of writing, the FTSE 100 price was still going higher, suggesting that a sizeable compromise is expected from the administration of Boris Johnson.

However, market participants still need to tread with caution as the market and the currency can see a reversal with any negatively perceived news, and the newly started trend would be supported as long as the latest headline indicates a possibility of soft Brexit. A substantial rally in sterling can be seen in the case of a slight decline in the probability of a no-deal exit, but the negotiation process is fraught with a myriad of challenges, which can derail the talks easily. Both the sides have considerable differences, and it is to be seen if they would be able to bridge those differences, which translate into detailed negotiations. However, the market is also anticipating whether Mr Johnson would ask the EU to extend the current Brexit deadline if the talks fail, and that would drive the direction of sterling.

The FTSE share price has also been boosted by positive news from the US-China trade war. In sharp contrast to the gloom that was seen before negotiations, experts reckon that a trade ceasefire was within reach as the US and Chinese officials started, new round of trade talks on 10 October. The possibility of a mini deal rose after US President Donald Trump said he was ready to meet Chinese Vice-Premier Liu He, and the market now expects a limited agreement which would entail the US putting off a further increase in tariffs in exchange for some concessions on the Chinese side. Any new development in the dispute would brighten the sentiments of global investors, which would also boost the FTSE 100.

However, there are still high chances that both the events would fail to materialise. The market for sterling is still biased in favour of downside protection, though demand for options that look for a weaker pound has subsided. While there are speculations in EU circles that Mr Johnson has conceded his hard position on the question of customs, details of the proposals have so far been closely guarded in by all the concerned authorities, keeping investors searching for signs from comments by leaders.

However, serious obstacles remain to be overcome in a limited time as a political storm at home is expected to be created if the PM has conceded on the EU demand that Northern Ireland can stay in the customs union, posing a massive dilemma for the hard-line PM. It would also infuriate hardline Eurosceptics in his own party and mean a betrayal of his repeated promise that the UK would exit without leaving Northern Ireland, but he also understands that he would be electorally punished if he reneges on his do or die promise to take Britain out of the EU by the latest deadline.