How To Trade 29th March When Theresa May Triggers Brexit

It is all about trading the event and timing is very important when it comes to it. The 29th of March is the day when the British Prime Minister, Theresa May will invoke the Article 50 and the UK will be entered in divorce negotiations of leaving the European Union. It may appear that the date is still far, but it is important as an investor that you are prepared for it. It is of vital importance that you know which markets and asset classes could see the potential impact on this event on that specific date.
 
I have always said, so far we have only seen a trailer of the Brexit film and the actual film will only be in cinemas after the Article 50 is triggered. It is only then, that we will start to see the concussions on the UK’s economy, consumer health, consumer confidence, housing market and the UK’s job market. There is no doubt that all these areas have performed relatively well. But, now it is time to get ready and brace real changes which are going to hit the economy.
 
The essential element is to know your risk profile before you jump into trading this upcoming event. You need to ask yourself a question; are you a passive investor – a trader who likes to wait for the trend to be established first and then trade it? OR are you an active investor, a trader who likes to get in first before the trade becomes crowdy?
 
Nonetheless, there are four asset classes which could see the potential impact of Theresa May’s action on the 29th of March
 
·         Currency -Sterling
·         Equity Market -FTSE 100
·         Fixed Income- The UK’s Guilt market
·         Precious Metal – Gold

 
Source: Bloomberg
 
Since the Brexit vote, it has been very clear that any weakness in the currency has pushed the equity market higher. The fixed income market- the UK Guilts, has been very much dependent on the actions of the Bank of England. Inflation in the UK has accelerated far more than many economists have predicted. For the first time in three-year, the inflation data released for the month of February has confirmed that the BOE’s inflation target has been breached.  Higher inflation is keeping a constant pressure on the BOE and the bank needs to increase their ultra-low-interest-rate to combat this. However, the BOE has fought back and maintained its position that they can increase or decrease the interest rate.
 
So far the bank has been very accommodating to Brexit woes.  After the 29th of March, the bank may have to do more if the economy slows more than their forecast. The bank can lower their interest rate or increase the asset purchase programme and that could potentially push the sterling lower. In the fixed income market, it means the yields could move lower on the UK gilts.
 
As for the equity market, the UK FTSE, the current relationship with sterling could change. The firms will be under pressure of higher input costs, but at the same time, they may be reluctant to pass those higher prices to consumers. Therefore, the balance sheets of these firms could have damaging shocks which could pull the FTSE 100 lower.
 
Within the FTSE 100, the sector which gained the most amount of attention at the time of Brexit vote was the European banking sector, particularly, the UK’s bank. The below chart clearly shows that how investors sold the sector on the back of Brexit referendum outcome news. Although, we have popped back up and have made new highs, but a number of investment firms and banks leaving the UK could only have a negative impact for the FTSE. The passporting right for investment firm is one of the biggest challenges for Theresa May which she will have to fight.
 
 
 
China, the world’s second biggest economy of the world, is a very important trading partner for the UK. The UK’s export has fallen the most among China’s top trading partner and this is going to make a detrimental impact on the UK’s GDP.
 
 
 
Finally, the risk-adverse mode is clearly seen when the precious metal starts to rise. It is highly possible that we may not see that much of an impact on the 29th of March, but the consequences of Brexit and negotiation process is going to create enough headlines which is going to make investors very anxious.

© Scoop Media