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Britain plays trick-or-treat game with the markets

FTSE 250, which is the most followed domestic stock index, is trading above its pre-referendum level.

By: | Mumbai | Updated: September 23, 2016 1:49 PM
brexit, britain, sensex, markets After formally bidding goodbye to the European Union on Jun 23, 2016, Britain has constantly come under the scanner of financial market experts.

After formally bidding goodbye to the European Union on Jun 23, 2016, Britain has constantly come under the scanner of financial market experts. Being the largest trading partner of the EU, it was quite expected that the separation would devastate Britain’s trade and economic activities. However, recent happenings in the economy have stunned the global markets.

FTSE 250, which is the most followed domestic stock index, is trading above its pre-referendum level. Even the critical economic indicators of Britain have come out on a strong note for the month of Aug’16 which has surprised the markets completely. It is quite understood that for any economy to perform consumer spending is a must. In the case of United Kingdom, even the Brexit catastrophe could not stop Britons from spending which saw a rise in the 2nd quarter of 2016. This boost in spending has benefitted other sectors of the economy as well.

Manufacturing PMI which was at 48.3 levels in July’16 increased to 53.3 in Aug’16. Even the service and construction sector grew more than the forecasted levels in Aug’16. Reason behind this sudden upsurge could be attributed to the solid inflows of new work from both domestic and export sources, the latter aided by the sterling exchange rate.

Stronger demand, product launches and clients committing to new and previously postponed contracts have worked in favour for the Britain’s economy. Business investments and labour market have also improved, though not drastically. Hence one can conclude that with spur in consumer spending, companies were able to sell more products and earn profits in turn providing more employment opportunities to Britons. This helped the Britain’s economic growth to stay at 0.6 per cent for quarter ending Jun’16.

From this, one can clearly make out that in spite of the Brexit catastrophe the overall sentiment in the Britain still remains positive. After all, the number of people voting to leave EU won by 52 percent in the referendum. However, one should not be enticed by this as there are many events lined up like the Brexit negotiations which could weaken Britain’s economy.

The negotiation talks with the European Union will not be an easy task. It is highly expected that United Kingdom will receive a cold shoulder from the top two powerhouses of the European Union i.e. Germany and France. They may even be frozen out of negotiations so as to discourage other countries from leaving the Union.

Recently the EU Parliament’s chief negotiator, Guy Verhofstadt said that it is not possible to give Britain the access to single market with limits on the free movement of people to the United Kingdom, to which the markets reacted negatively, pushing GBPUSD to trade lower on 21st Sep’16. Many member nation of the European Union from the east have also warned that they will not support Britain’s Brexit deal unless their citizens are given full access to live and work in the Kingdom.

This toughness in tone of the European Union ministers was quite expected since Britain has failed to give full details about what it wants in the brexit deal. The newly elected Prime Minister of UK, Theresa May has been heavily criticised for not setting clear goals for the negotiations. Hence she will have a tough job ahead to please the member nations of European Union, the Parliament of United Kingdom and most importantly the general public of United Kingdom.

The coming months will be quite a game change for the monarchy country. The negotiations between European Union and United Kingdom will be highly important as it will decide the course of economic path of both the territories. Any unexpected development will lead to sharp decline in the value of Sterling Pound which might lead to another round of easing by the Bank of England.

(The author is associate director, commodities and currencies, business, equity research and advisory, Angel Broking)

Tags: Brexit
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