Market Event, General

Top 5 volatile markets to watch during Brexit

Ben Weiss, Thursday, 26 September 2019

5 Markets affected
We've gone for just five markets, but truth be told this list could have been in the thousands. Like a black hole, Brexit has indiscriminately sucked everything into its chaos, and few markets seem to be safe. But some are naturally more affected by Brexit news and its developments than others. Here are the ones we think are most likely to be affected by the departure. 

GBPUSD

Unsurprisingly, GBPUSD is a market that’s highly susceptible to Brexit changes. Being the third most commonly traded foreign exchange (FX) pair, behind EURUSD and USDJPY, it makes up 9.2% of total FX trades.

With confidence in the pound fluctuating as traders try to determine its future strength, most FX pairs consisting of GBP are in the same unpredictable boat. Uncertainty surrounding the future of the UK doesn't impart confidence in GBP. Equally, any news coming from Brexit that offers clarity and implies something beneficial to the UK could have a positive impact upon GBPUSD.

As one of the most trusted and valued currencies, USD will be used as a measure to determine just how strong the pound is. 

Brexit high: 1.50189 in June 2016.
Brexit low: 1.17773 in October 2016.

Brexit - GBPUSD


More recently, the political aspect of Brexit regarding Boris Johnson and his role as PM has influenced GBPUSD. Speculation over his future and whether or not he will resign as Prime Minister, following his unlawful prorogation of Parliament, has caused havoc with cable. 

GBPEUR

With the pound and the euro being the currencies most commonly used between the two parties involved in Brexit, the UK and the EU respectively, GBPEUR is an obvious choice for this list.

Free movement is still available for citizens residing within the EU, so GBPEUR is still very much in demand. However, every turn in the road towards Brexit affects the price, and the FX pair has experienced heavy fluctuation since June 2016. Similarly to GBPUSD, GBPEUR will be looked upon to determine the strength of the pound, as the FX pair has a direct link to Brexit. 

Brexit high: 1.31573 in June 2016.
Brexit low: 1.04660 in October 2016.

Brexit GBPEUR

Euro Stoxx 50

This index is consists of 50 European equities that are from a nation within the eurozone. It aims to give a representation of blue-chip stocks across Europe. 

Naturally, given the impact that Brexit could very well have of European companies, it's an obvious market that should be watched. Where the DAX can give an overall representation of European economic performance to a degree - given that it's the largest economy in Europe - Euro Stocks 50 provides a more accurate overview. 

Where Germany and German companies might be able to partially mitigate the effect of Brexit, Euro Stoxx 50 will measure and display how well Europe as a whole (or at least those companies within the eurozone) is mitigating the impact of Brexit. 

Any progressions or Brexit news should be more of a certainty to affect this index, given its wide coverage of European equities. 

Brexit high: 3709.0 in October 2017.
Brexit low: 2675.0 in June 2016.

Brexit EuroStoxx 50 - Copy

UK 100

It’s another selection that is predictable, but well worth its spot on this list. The UK 100 is an index compromising of the top 100 UK companies based on market value.

With such weighting being put on the UK 100 as an index in determining how well the UK economy is faring, it becomes highly susceptible to any news coming out surrounding Brexit. Many of the companies on this index have taken measures to counter any effect the departure may have, for instance the likes of Rolls Royce's partial move across to Germany. 

Some of the smaller firms within the UK 100 simply don’t have the capital or means for such drastic alterations, and will thus have to face the consequences of Brexit head on. This is why the UK 100 will be one of the most volatile indices affected by Brexit.

Brexit high: 7903.2 in May 2018.
Brexit low: 5728.6 in June 2016.

Brexit UK100

Dax 30

The DAX, similarly to the UK 100, combines the largest 30 German companies in terms of market value together in an index. With the UK being one of their major trading partners, Germany and the UK’s economy are closely integrated.

Car production for one, is one of the largest exports for Germany, and the UK is equally one of the largest importers of German cars. As such, many car manufacturers specifically may feel the brunt of Brexit, and with BMX, Daimler, ThyssenKrupp, Continental and Volkswagen all part of the DAX index (making up just shy of 10% weighting), the DAX could be very reactionary to Brexit progressions.

Brexit high: 13601.2 in January 2018.
Brexit low: 9163.5 in June 2016.
Brexit - DAX

3 things to watch that might affect the markets

Boris Johnson's position

If you don't know at this point that BoJo is a 'leaver' then you can't have been following the Brexit situation too closely. He was a vital figure in the Leave campaign, being a strong advocate of giving the UK its financial and regulatory independence rather than be bound by EU practices.  

As PM, the markets have reacted heavily as he has clearly outlined his intentions to remove the UK from the EU - 'I'd rather be dead in a ditch than agree to a Brexit extension.' His position as PM will be crucial to track. Were he to leave his post, there might be a greater chance of a softer deal, or even the UK remaining in the EU depending on his successor. 

With the prorogation of Parliament, Johnson's position became unstable as he was at fault for going against legal procedure. The pound, for instance, reacted with heavy volatility and fell significantly lower against the dollar and the euro. 

Soft or hard Brexit?

It's an obvious one, but whether or not the UK experiences a hard or soft Brexit come deadline day will be a crucial driver of confidence - thus a mover of markets. It seems it's heading toward a hard Brexit as politicians are, for one, struggling to agree on a deal that suits the UK, let alone one that satisfies both the UK and the EU's agendas. 

A soft Brexit would allow companies to run with little disruption to how they operated pre-Brexit. But a soft Brexit would more crucially instil confidence into companies, traders and investors that could keep markets from diving. 

Alternatively, a hard Brexit could cause panic - despite the fact that the presumption of what that would mean would almost certainly be worse than the reality. Companies would plan for the worst and many changes throughout multiple industries would have to be made. 

Until the UK actually leaves the EU, or until it officially decides to remain in it, what type of Brexit it will be will and to what extent a hard Brexit may damage the markets will not be known. Even once the UK leaves, there may be a negotiation period by which both parties can discuss plans going forward. 

Either way, it will be vital to look out for the outcome of Brexit and identify exactly how the UK is leaving. Once definitive answers are given, markets will react. 

Trump (and his informative Twitter account) 

Donald Trump isn't in charge of the UK, nor is he directly involved in the European Union. So how does he fit into this equation? Not only is he perhaps the most influential people who can single-handedly affect the markets, but his relevance as leader of the US comes into more prominence post Brexit. 

With the EU being the largest trading partner of the UK, trade between the two is bound to decrease post Brexit as the UK leaves the European Single Market. Given its ties as a political ally, the US seems like a primary choice to enhance trading activity with the UK, so here's where Trump comes into it all. 

The President has already claimed that he will get a 'magnificent' trade deal that will benefit both countries. Could he be the key for the UK after it's left the EU? His Twitter account will be another aspect to monitor. It's his first call to broadcast his opinion and update the world into US developments. Any insights into future trade deals that could heavily bolster the markets will almost certainly come from Twitter. 

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