Featured Chart Week of Oct 3 – FTSE breaks out between Brexit, GBP and PMI developments
19:00, 02 October 2016
· By CMC Markets
Last weekend, UK PM Theresa May announced that the UK will trigger Article 50 by the end of March 2017 to kick off the formal Brexit process, sparking a selloff in Sterling. The lower pound, however, has done wonders for the UK economy and UK stocks over the summer with manufacturing PMI beating the street and more data on the way this week.
For the better part of a year before the June Brexit vote, the FTSE had traded in a channel between 5,500 and 6,500 with an initial rally off the February low stalling in the spring. While the decision by UK voters to leave the EU sent Sterling lower, it sparked a major rally in the FTSE from near 5,700 toward the 6,600-6,925 range initially.
On Monday, The FTSE broke out of this channel calling off a triple top and signalling the start of a new upleg. This upturn was confirmed by the RSI breaking out of a downtrend. Next potential resistance tests appear near the 7,000 round number then 7,050 and 7,250 based on measured moves from recent trading channels. .
The crash in the Pound has made UK stocks look a lot more attractive over the summer for two main reasons.
1) Many UK companies, particularly in the FTSE 100 are multinationals, and many are listed on multiple exchanges. The diving pound make these companies suddenly a lot cheaper in UK terms relative to their peers.
2) The sudden large devaluation of GBP has also suddenly made UK companies a lot more competitive than their peers in other countries, improving their earnings prospects. The GBP crash has made UK exports a lot cheaper and imports to the UK a lot more expensive.
This positive impact can be seen most clearly in UK manufacturing PMI announced Monday. Once again pessimists on the street were proven to be dead wrong. The street had been expecting UK manufacturing PMI to fall to 52.1 from 53.5, instead it soared up to 55.4.
Over the course of this week, more UK PMI reports are due for the construction and service sectors. Later this month corporate results or updates may give a better idea of how individual companies and sectors have been affected or benefitted from the Brexit decision.
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