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12% gains in FTSE 100 Index Fly in the Face of Brexit Fears

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March 6, 2016 By: , No Comments

Bracing for a Brexit but Bullish to Boot!

2016 has been an annus horribilis for major averages, the FTSE 100 index included. For the year-to-date, equity markets around the world have endured a torrid time. A combination of factors has dragged stocks lower, notably China and EM weakness, the plunging price of crude oil, and a surging USD. However for the final week of February leading into the first week of March, the FTSE 100 index completed its third successive week of gains. Now, the U.K.’s premier index is marginally below its opening value from January 2016. The FTSE 100 index opened 2016 at 6,242.32 and closed on its first trading day at a value of 6,093. At its current level, it is markedly higher (+12%) than the multi-year low point it hit in February 2016.

 

How is the UK economy performing?

In February 2016, the services sector in the UK hit a 3-year low point as poor economic performance continues to dog the economy. For starters, the PMI index dropped to 52.7 last month, from 55.6 in January. This represents its poorest performance since 2013. The reading of 52.7 remains expansionary (given that it is above 50), but the decline from 55.6 is a worrying trend for the UK. What is more significant is that the PMI data is now below the long-run average which runs through the 55.2 level. During Q1, 2016 it is expected that the UK economy will grow at just 0.3%. The confluence of multiple factors for the UK means that the overall sentiment for the economy is negative.

 

Services sector performance declines are particularly worrying, and the upcoming summer referendum on Britain’s membership of the European Union is weighing heavily on the minds of speculators. While the yes camp has a slight advantage over the no camp, there is enough uncertainty in the outcomes to generate tremendous volatility in the markets. However despite the negative economic data, the FTSE 100 index appears to be holding its own. There is what analysts are calling a cautiously optimistic mood taking root in London. One of the most significant improvements is in mining stocks such as Anglo American, BHP Billiton, Rio Tinto plc and Glencore plc. Recall that mining companies were among the hardest hit alongside financials at the start of 2016. Naturally, discretionary spending will come under pressure as the June 23, 2016 referendum nears. Likewise, corporations around the UK will refrain from making further investments until they know which direction the referendum will go.

 

For Now it’s a Wait and See Game for UK Spread Bettors

But there are naysayers out there too since gold has enjoyed its best start to a New Year in a long time. In fact, gold bullion is officially in bull market territory having gained over 20% since its low last year. The parallel rallies in gold bullion and equities on the FTSE 100 index are an anomaly that very rarely takes place. Typically, equities will rally when gold is plunging, or equities will fall when gold is rising. But the current performance of the FTSE 100 index has nothing to do with the Brexit issue. It has more to do with a bullish US economy, a strengthening Chinese economy, a weaker British pound and a global uptick in mining stocks.

 

But it’s not going to be plain sailing for the FTSE 100 or the UK economy before the year is out. There are concerns in the UK that cheap oil prices could lead to plunging equities as they did in the US given the close correlation between oil prices and equities. When markets are turning bearish, people want to sell out as quickly as possible so as to avoid further losses to their portfolios. Traders who are gauging daily market sentiment are taking spread betting positions on the mood of the moment vis-à-vis the Brexit referendum. If voters decide against a Brexit, equities markets will rally and the GBP will strengthen. In the long-term however, equities will be impacted by declines in exports.

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