IFC Markets | Jun 27, 2016 09:36AM ET
Brexit a surprise for UK stocks
FTSE 100 stock market index declined on Friday having opened with a sharp gap lower after the referendum results showed Britons voted for leaving the European Union. The UK economy slowed in the first quarter of 2016, and the Bank of England’s accommodative monetary policy has not succeeded in boosting inflation. Will the FTSE 100 index continue correcting down?
UK stocks fell sharply as the British vote to leave the European Union didn’t improve the uncertain UK economic outlook. The direct positive effect so far from the decision to leave the European Union is the sharp Pound depreciation, which will make British exports more competitive in overseas markets. Thus the improved external trade balance will help boost economic growth. But the prospects of the financial sector, which is one of the major sectors, deteriorated considerably with increased uncertainty the decision to exit from EU generated. The European Central Bank had warned Britain that the decision to leave the union will have significant cost implications for the British financial sector as the EU will have to review the financial regulations for British financial institutions which are an important financial center for euro denominated financial assets trade. The country will also have to negotiate new trade agreements as it leaves the EU and it cannot be ascertained how beneficial new arrangements will be for the UK economy. And the Bank of England will likely have to keep low interest rates longer to support the economy as the decision to leave the EU increased risks to downside for UK economy. The recent UK economic indicators were mixed. The retail sales rose in March and April. The GDP growth in first quarter slowed to 2% year over year from 2.1% in fourth quarter of 2015. It was the weakest growth in three years due to a slowdown in household consumption, exports and a fall in business investment. The unemployment rate fell in April to 5% from 5.1% and average earnings rose 2.3% excluding bonuses. The consumer price inflation in May edged to 0.2% year over year from 0.1% in April. Inflation in coming periods will likely rise due to weaker Pound. On June 30 Gfk Consumer Confidence for June will be released, the tentative outlook is negative for the Pound. The same day the final reading for Q1 GDP will be released, no change is expected from the previous estimate. On July 1 the Manufacturing PMI for June will be published, Industrial and Manufacturing Productions for May will come out July 7- the outlook is positive.
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