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Opportunities In Unrest: Where Are Global Markets Heading? Part 3: Europe

With twenty-four hour news and events shared instantaneously through social networks, it feels like the world is in a constant state of unrest. With Trump making bold statements in America, the North Koreans rattling their swords and Europe plunged into uncertainty through Brexit, we examine how the markets are behaving and what lies ahead for short-term traders and long-term investors alike.


The Brexit effect: Which way will Europe go?

Since the Brexit vote in 2016, many European countries – including Germany, France, and Italy - have been desperately fighting to unite Europe as a global force to be reckoned with, up against Trump’s America and a soon to be independent UK. However, rumours of smaller and more independently-minded European nations seeking new and special status relationships with the UK are never far off. Andorra, for example, is not currently in the EU but has special legal status within the EU. Liechtenstein is in the European Economic Area, which makes it part of the single market and while it is not in the EU customs union, it applies certain EU laws and is within the EU internal market.

While a special status bid by Ireland was defeated this July in the European Parliament, it may not be the last one, and it will certainly be interesting to see if other countries follow suit. No other nations have gone down this route, but the option is not yet closed.

The great bank migration

Brexit certainly seems to have muddied the waters for banks in particular, and specifically as to whether or not they want to set up shop in the EU. In May 2017, new available jobs in London’s financial sector fell by 16% relative to the same period the previous year. And while Frankfurt and Dublin are emerging as the favourite destinations after Brexit in terms of attracting investment banking jobs, the announcements of actual or planned reassignments add up to a potential 17,000 jobs leaving London, out of a total of 94,000 London-based positions currently accounted for by the dozen largest investment banks.

Several large banks – such as Bank of America, Deutsche Bank, and others - have already started to move thousands of jobs out of Britain to prepare for the country’s planned exit from the EU. And while banks are unlikely to move all operations overseas, many have started to hire new staff in EU locations or relocate some staff from London. Furthermore, if Europe cuts off London’s deep financial markets when Britain leaves the EU, costs will likely rise for Europe’s banks and other companies. Both Europe and Britain could suffer as a result, and EU markets may be seen as less of an opportunity when compared to other global markets.

An acrimonious divorce or new friendships?

So how do markets see all of these changes - as a possible disintegration of Europe, or as something that will create a stronger unification? The economic catastrophe predicted to result from an "out" vote in the June 2016 Brexit referendum has so far failed to materialize. Subsequently the UK economy has grown more strongly than most other developed economies. However, the pound has weakened sharply, and remains substantially below its pre-referendum level. Effects of the weak pound include higher prices for goods in shops, with the cost of many services likely to rise too. A more significant effect for investors is that the dropping value of the pound has helped lift stock markets.

With the UK stock market bullish and Brexit negotiations making headlines across Europe, it would appear that an acrimonious political divorce is set to unravel before our eyes over the next couple of years. Currency markets will continue to see volatility as they seek new levels to support the new economic realities of a European economy with an estranged UK.

Avoiding a messy divorce

Britain’s departure is bound to leave a major hole in the EU’s finances. As ‘divorce bill’ negotiations continue into the end of 2017, the EU understandably wants to ensure that all financial promises made by the UK during its period as a member state are kept.

But is it really that simple? Liam Fox, Britain’s Secretary of State for International Trade, says that Britain can only come up with a figure for a financial settlement with the EU once a Brexit deal has been agreed upon, warning leaders not to believe the rumours that London was bluffing over the possibility of not making a deal.

Ratings agency Standard & Poor's - for its part - has warned that the European Union's credit rating could be at risk of downgrades if the UK refuses to pay a Brexit divorce bill of up to €60 billion, saying that the EU’s ratings could come under intense pressure in an adverse scenario.

In the end, the UK likely won’t come away unscathed. If there is uncertainty as far as what will happen in Europe, it could have a negative effect on British trade as well, and ultimately have dramatic consequences for overall investment in the UK.

So where does this leave traders going forward?

After the Brexit vote, European currencies dipped to lows not seen for decades. The pound was trading against the dollar at 1.21 earlier this year and eurodollar has seen lows of 1.05 in the last twelve months. However, these currencies have since rebounded somewhat, and future returns may still prove positive. If Prime Minister May reshuffles her cabinet to weaken the power of ‘hard Brexit’ advocates, the pound could surge. The Eurozone, meanwhile, has been through worse, and if anything, has proven itself as a survivor, usually growing solidly in the end.

24 Option’s partner Alpesh Patel, an award-winning analyst and author says: “Longer Term: We are long GBP-biased, feeling that the market view is that the reality of Brexit will not be bad as the immediate fears, with likely rate rises boosting the pound also, as well as a rebalancing of the rate thanks to pound demand from a boost in inward investment, and the current account rebalancing from an eventual rise in exports.

CFDs are leveraged products that involve substantial risk and may result in the loss of your entire balance.

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