Market Spotlight: FT markets’ Brexit analysis and comment

In recent weeks, FT markets has written extensively on the twists and turns seen across currencies, bonds, shares and commodities around the UK referendum on the EU. Here’s an updated selection of analysis and comment for readers to review.

Peter Brooks of Barclays argued that the markets’ anxiety over Brexit could be seen as an opportunity as well as a threat. “When times are stressful and uncertain, investor focus tends to shift to excessive concern about what will occur in the short term, and away from calmer reflections on long-term value opportunities,” wrote the bank’s head of behavioural finance at its wealth and investment management arm.

Fidessa’s director of group strategy, Steve Grob, warned that any efforts to dismantle the UK’s trading dominance as part of the Brexit agreement could hurt Europe more than London.

John Authers named prediction markets as the big losers from the Brexit outcome in his Long View column. “It would be wise not to repeat sterling buyers’ mistake, and approach future binary events, such as Italy’s referendum and the US presidential election, with caution,” warned the FT’s senior investment commentator.

There were signs that traders in the US saw Brexit as a buying opportunity for big-name European stocks, wrote Stephen Foley. While our US investment correspondent said some companies looked undervalued, he also warned that the outlook for new capital in the context of longer-term uncertainty was more problematic. In a later column, he also warned that bond vigilantes expect more eurozone fireworks, with some US hedge funds ready to bet on a eurozone break-up.

Philip Stafford rounded up the main questions, and answers, posed by Brexit for the City of London’s status as Europe’s main financial trading centre.

“Currently, the market infrastructure based in London meets European standards but once the UK has left, London-based exchanges and clearing houses will need to have equivalent regulatory status to be able to operate in the EU,” wrote the editor of the FT’s Trading Room pages.

Brexit trades designed for a longer-term outlook were assessed by Miles Johnson, Dan McCrum and Stephen Foley. Hedge fund traders are now thinking whether managers of so-called “real money” — meaning insurance companies and pension funds managing many multiples of the assets controlled by hedge funds — could begin to shun British assets.

“These large institutions have substantial holdings in gilts, UK government debt, that some may seek to offload if they lose confidence in the stability of the British economy and political establishment.”

Investors’ response to the vote is likely to be shaped by the reaction of central banks. Rochelle Toplensky and Michael Hunter summarised the potential paths ahead for the world’s main monetary authorities.

With Britain and Europe going their separate ways, they do share similar problems — not least a future with draining confidence in their currencies.

“An EU without Britain deprives the continent of a counterweight to Franco-German dominance; Brexit triggers greater Euroscepticism across Europe; investment uncertainty in the UK risks having a contagious effect,’’ wrote Roger Blitz.

In the immediate aftermath of the vote, investors hammered the pound and share prices, led by the domestic FTSE 250 index. Michael Hunter and Rochelle Toplensky looked at the bleak scenario facing medium-sized UK companies after Brexit.

‘’Housebuilders and other stocks exposed to the UK housing market look set to face a particularly strong blend of negative factors.’’

In contrast, many blue-chip members of the FTSE 100, outside of financials, have suffered less. ‘’The steep and continued decline forecast for the pound offers a buffer for the UK-listed companies that earn their revenue in foreign currency, offering the more international FTSE 100 relative support compared with its mid-cap counterpart.’’

Brexit also compounds the existing problems faced by banks. Thomas Hale and Rochelle Toplensky wrote: ‘’The vote to leave comes at a sensitive time for financial institutions, the latest danger for a sector which was already under pressure to generate profits as bond yields collapsed towards zero, or below.’’

The market turmoil triggered by Brexit has herded investors into havens, but gold may face considerable headwinds, write Henry Sanderson, Neil Hume and David Sheppard.

“Analysts are questioning whether gold will be able to make further gains, having already risen by almost a quarter this year in dollar terms and by a third in sterling. For all the volatility a Brexit vote could trigger, gold faces its own headwinds..

“Something very bad has happened” defined the market’s mood in the immediate aftermath of Brexit on Friday. Dan McCrum drew on FT markets’ global presence and anchored a blow-by-blow account of the global trading day that began once the UK polls closed.

“As the pandemonium unfolded, it became clear that many traders had been left complacent by opinion polls indicating that UK voters would side with the status quo. Bankers, brokers and investors scrambled to limit losses as trillions of pounds, yen and dollars changed hands in a rush for the havens of gold and government bonds.’’

Playing a starring role in the market turmoil was the pound, and Roger Blitz, the FT’s currency correspondent, wrote of a historic night for sterling.

“When the UK currency briefly rose above the $1.50 mark about an hour after voting ended late on Thursday, it seemed merely to cement markets’ confidence that the electorate had decided to stick with what they know. However, by the time dawn broke over a divided UK, the market had dragged the value of the pound more than 17 cents lower, thrown the yen, the euro and many other currencies into violent swings and reignited fears of a renewal of currency wars.”

Big shifts in currencies have defined the world’s truly global market during the post Bretton Woods era and pound sterling has experienced its fair share of them. Roger Blitz examined Sterling and Brexit , exploring the lessons from past crashes, writing:

“The pendulum will swing back and forth, but eventually the pound may end up where it began the year. But investors may need a lot of patience and an awful lot of luck to come through that experience in one piece.”