Market sentiment in the UK is going through a volatile period after the 2016 vote to leave the European Union (EU). The ripples have been far reaching, and as a result the UK economy is suffering.
Due to the current lack of certainty over Brexit, Britain’s vote to leave has had a major impact on world financial markets. While the pound has steadied, the UK still fell out of the top 5 world economies last year. Brexit negotiations continue to affect market sentiment due to the uncertain economic and political future of the country. From news regarding the UK’s exit from the Customs Union and Single Market, to irking statements made by Boris Johnson, public opinion continues to be fractious.
Market sentiment has always been hard to predict; it is an unquantifiable reaction that at most times is not logical. According to the Review of Stock Markets’ ‘Reaction to New Events: Evidence from Brexit’ study, it is measured by an approach known as investor sentiment, which is often biased and tenacious, and runs opposite to the logical Efficient Market Hypothesis (EMH), based on publicly available data that predicts market changes. For example, the pound plunged to a 31-year low immediately after the vote and is yet to fully recover. Global stock markets were also thrown into disarray, exhibiting somewhat of a “Jekyll and Hyde” approach, as we previously mentioned here on The Armchair Trader. This has led to currencies, banks, commodities, bonds and automakers scrambling to react and affecting the current market sentiment.
Since the Brexit vote, the Purchasing Manager’s Index (PMI), has been regarded as an objective and important barometer of how the UK economy is really performing. While the PMI is generally used to measure the health of the manufacturing sector, we also mentioned that it is applicable to sub-sectors such as the services sector in our article ‘What is the Purchasing Mangers Index or PMI?’. PMI for the services sector is widely regarded as a benchmark for the UK economy, and one of the most closely watched economic indicators in the world. FXCM’s economic calendar tracks financial events such as the IHS Markit PMI. Due to the current uncertainty the PMI fell to 51.7 in March of this year from 54.5 in February, and well below the market expectation of 53.9 reported by Trading Economics.
With the UK economy in a state of limbo regarding its future trading partners and global status, the increasingly fractious split in May’s cabinet only serves to exacerbate market sentiment, which is worrying investors. The referendum campaign has also come under scrutiny due to revelations that data may have been illegally acquired to target voters. This has put the validity of the vote in question and has had a negative effect on market sentiment. The fact that the UK could be worse off under every post-Brexit scenario has put the country’s economic and political future in uncertain waters. The full effect of which won’t be known until it is too late to turn back.