This week was always going to be a big one for global financial markets, with the European Union summit pencilled into most investors’ calendars. However, following the presumed successful meeting last week between PM Johnson and his Irish counterpart, optimism for a potential Brexit deal has been ramped up.
The top EU Brexit negotiator, Michel Barnier, will be meeting with UK Brexit secretary Stephen Barclay today as preparations build for the summit on Thursday and Friday.
Following this, if a deal is agreed by the EU, then Parliament is likely to be called for a session on Saturday and will vote on the proposed deal. If nothing is agreed, the Benn Act forces the Prime Minister to ask for an extension of the negotiations.
What does this timeline mean for your portfolio?
Exporter sensitivity
The British pound (GBP) has moved strongly higher over the past few days as optimism builds. Traditionally, this has a negative correlation to FTSE 100 UK stocks, so when GBP rises, the FTSE 100 falls. This is mostly due to the exporters in the index who earn most abroad and thus have to repatriate different currencies back into GBP.
Have a look at which companies are more domestic in earnings, as these are likely to perform well. Examples of this can be seen in the healthcare and property sectors.
Interest rate sensitivity
When speaking to a friend recently, I flagged how Lloyds Banking Group would be sensitive to movements in interest rates post-Brexit. If we take a look at the share price over the past week, we can see Lloyds is up over 15%. Now, while this is due to several factors, one is that the probability of an interest rate cut by the Bank of England has shrunk significantly.
If the UK agrees a deal by the end of this week, the need to cut interest rates to bolster a shaky economy is unlikely to be there in the short term, which is seen as a positive. Since most of the banking sector relies on high interest rates to boost its net interest margin (essentially the difference between the rates it lends at versus those it borrows at), this will likely boost the share price of this sector.
Trading terms
It is definitely worth seeing this week what arrangements are being made for companies to trade into the European Union as part of any deal that is agreed. For example, companies with a large European presence (think of some retail players and some pharmaceutical firms), could struggle with any change of rules and regulations imposed via a deal this weekend. This could affect the share price of these firms in the short term.
In this case, I would favour buying domestic firms again, which should be shielded from this friction on the border. These companies will also benefit from the strengthening British pound, mentioned earlier.
Overall, follow the Brexit timeline closely, we could be in for a lively weekend!
