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Pressure release as FTSE 250 surges on Conservative landslide

CMC Markets

After over three years of delay, procrastination and ferocious bickering, the fog of Brexit has finally started to clear after the incumbent Conservative government won a landslide victory in what became very much a second referendum on leaving the European Union.

The scale of the victory means that UK prime minister Boris Johnson will now be able to pass the withdrawal agreement through parliament by the end of January 2020, in the process dashing any residual hopes that Brexit could be reversed.

The winning margin also means that the UK government will be able to hold a stronger line, as well as be much more flexible, when it comes to negotiating the next stage of Brexit talks over the future relationship.

Once the withdrawal agreement has been passed the next signpost will be the end of the transition period which ends on 31 December, and given the limited timeframe available we may well find that deadline needs to be extended.

For now UK politics looks to be in a very different place from where we’ve been over the last three years, which to all intents and purposes has been on pause, and completely gridlocked. Of course that doesn’t mean Prime Minister Johnson’s problems are over, he just has a different set, and Scotland is likely to be a significant one given that the SNP will be looking to hold another independence referendum in the not too distant future.

Not surprisingly the pound has surged overnight, hitting a three-year high against the euro, as investor concerns over a Labour government's anti-business policies has evaporated.

More importantly the FTSE 100 and FTSE 250 have seen a new lease of life this morning, surging in early trade as the various nationalisation discounts that have been in place since 2017 start to roll-off for companies that have found their valuations depressed by concerns over government appropriation, in the event of a Labour win. There are also expectations that we could see fiscal stimulus unlocked in 2020. 

It’s a sea of blue for the FTSE 350, with early gainers across all the major sectors, with big percentage gains of 10% or more for companies like Stagecoach Group and Serco, while on the construction and housebuilders sectors we’re seeing big gains for Galliford Try, Balfour Beatty, Berkeley Homes and Persimmon. Retailers are also surging with Dunelm and Marks & Spencer notable beneficiaries, while Royal Bank of Scotland are also surging. This is an incredible reaction given the rally in the pound as well, but it also speaks to the relief of a pressure valve being released as money flows back into UK assets, now that the risk of a Labour government has been comprehensively dispatched.

As such we’ve seen European markets surge on the open, helped also by news that the US and China have agreed an interim phase one trade deal which has seen the upcoming 15 December tariffs on $150bn of Chinese goods cancelled.

While this is welcome news, it doesn’t appear that China is completely on board with whatever has been agreed given comments by the Chinese foreign ministry that any deal agreed must be mutually beneficial.

The DAX has also opened higher, trading at its best levels since February 2018 as the prospect of a messy Brexit and its effect on the German economy subside.

US markets look set to build on the gains today in Europe, with more record levels as optimism grows that two of the major sores on the global economy may be closer to coming to some form of resolution.

 


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