Brexit Cometh

Brexit Cometh

over 4 years ago2 mins

Mentioned in story

It’s been more than three years since a smidge over half the UK voted to leave the European Union, and yet the future of Britain’s relationship with the EU is still fuzzy. But don’t worry: here comes investment bank Goldman Sachs with a report on how investors might react if they reach a deal this week.

What's going on here?

When EU leaders meet in Brussels on Thursday and Friday, the UK government will be keen to get an agreement on withdrawal terms it can then put to Parliament in a special sitting on Saturday.

Despite the hurdles, Goldman thinks a deal is the most likely outcome – at least eventually. It reckons there’s a 60% chance of the UK leaving with a deal, a 15% chance of it leaving without a deal, and a 25% chance that Britain ends up remaining a member of the club.

What will a deal mean for markets?

Goldman reckons the Britsh currency – which has taken a pounding (ahem) since the Brexit referendum in 2016 – will hit $1.30, a gain of about 3% from current prices. And the rally could well go further: traders still have a net short position (as the chart below shows). In other words, more investors are betting on declines than gains, and they’ll be forced to reverse those trades quickly if the pound moves against them.

Source: CFTC, DailyFX
Source: CFTC, DailyFX

In the stock market, Goldman predicts companies with a UK focus will do better than those who make their revenue from overseas. (That’s why analysts earn the big bucks, right? 🙃)

For every 1% gain in the pound, Goldman thinks you can expect to see a similar performance in domestically-focused UK stocks, compared with the wider UK stock market. As you can see in the chart below, stocks reliant on Britain for revenue – from building firms like Travis Perkins to banks like Lloyds – had strong gains on Friday in anticipation of a Brexit agreement.

Source: Goldman Sachs
Source: Goldman Sachs

And according to Goldman, expect a deal to prompt a drop in UK government bonds – and a rise in yields of at least 0.2 percentage points – as investors move money out of these safe assets.

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