Domestic Stocks Of The UK Edging Higher Amid Pound Rally And Increasing Optimism Over PM Johnson’s Victory

Domestic stock benchmark of the UK, the FTSE 250 index is edging higher on the third straight day in a row as on December 06, 2019 and traded 112.0 points or 0.54% higher to 20,819.22 at 09:04 AM GMT. The sharp reversal in trend the domestic index recorded was largely on account of the recent rally the British Pound recorded in the past couple of days.

The Pound gained approximately 1.8% in the past five trading sessions and crossed the crucial resistance level of 1.30 against the US Dollar. However, after four consecutive days of rising till December 05, 2019, Pound was trading lower in the December 06, 2019 trading session.

Although, despite a decline in today’s session (December 06, 2019), the British currency managed to trade above all the crucial long-term and short-term levels like 10-day, 20-day, 50-day, 100-day and 200-day simple moving average prices (SMA). Also, the Moving Average Convergence Divergence is rising, with the difference between 12-day Exponential Moving Average and 26-day Exponential Moving Average (EMA) turning positive. Also, the MACD line is trading above the 9-day EMA signal line.

As we know that, strengthening Pound will boost UK’s domestic stocks largely, as it will lower their import bill, foreign currency interest payments and other foreign currency dominated obligations.

Since the Brexit referendum took place in the year 2016, the British currency tumbled sharply against the greenback, which had impacted the UK's domestic stocks heavily.

Also, the Brexit related uncertainties have dented the UK's economy heavily, which has jolted consumer sentiments, investments and heightened business risks as well over the potential future trade relationship with the European Union block. 

Domestic stocks were badly beaten up in the last three and half years, on account of uncertainties over the Brexit. It is widely recognised that a hard Brexit would likely have severe impacts on the UK businesses as it will no more be able to enjoy the single market and goods and services can't move smoothly and this would ultimately disrupt the UK headquartered businesses’ supply chains.

However, increasing chances of PM Johnson returning back to power with the absolute majority and optimism that he would deliver Brexit on the terms of the deal he had negotiated with the EU block in late October, this year, is pulling up British currency and domestic stocks as well.

British Pound devalued substantially over the fear that there could be a potential no-deal Brexit between the UK and EU, which would have been worst for the UK’s domestic assets. And, since the Boris Johnson took oath as the new Prime Minister of the UK, the fear of no-deal Brexit was at the top because of radical comments delivered by the PM Johnson during his election campaign.

But now the fear of a no-deal Brexit is significantly off the table and the increasing possibility of PM Johnson to come back with the absolute majority is cooling down the risks of no-deal Brexit as well.

In the recent opinion poll surveys, it was indicated that PM Johnson could bag absolute majority in the December 12, 2019 general election and this would allow him to deliver Brexit as per the deal he has negotiated with the EU bloc in late October. So, we are not going to have a no-deal kind of Brexit anymore.

But many times, opinion polls surveys have gone wrong, as in case of 2017 general election, in which it was highly recognised that ex-Prime Minister Theresa May could secure an absolute majority for her party. Instead, she lost some of seats of the Conservative party to the Labour Party which sent Brexit into a mess.

However, this time also the situation is very critical, as political parties have presented radical manifestos, which was getting traction from the different parts of the country.

In the wake of a Hung Parliament or Labour party securing the majority, the recent rally that the British currency has recorded could claw back, as it will again send Brexit into a mess. During the election campaign, Labour party leader Jeremy Corbyn vowed to hold Brexit and go for another round of referendum and also said that they would negotiate another Brexit deal with the European Union.  This would be bad for the economy as it will again raise uncertainties and a fear of no-deal Brexit.

Or, in the wake of a Hung Parliament Brexit will again get stuck, which will pare all the gains the British currency and mid-cap index FTSE 250 has accumulated over the past few days and this time fall in GBP and equities could be substantial.

However, since British assets sent some classical signals of recovery in the past couple of session, it is gaining traction from the global portfolio investors, and many are betting on the UK equities to deliver the best returns among global equities for 2020. But any adverse outcome from the December 12 general elections could make things worse again.

Meanwhile, the mid-cap index is soaring up, and at the current trading level of 20,819.23 as on December 06, 2019, it was traded well above its crucial long-term and short-term support levels of 200-day, 100-day, 50-day, 30-day and 10-day simple moving averages. Also, the Moving Average Convergence Divergence is rising, and the difference between the 12-day Exponential Moving Average and 26-day EMA is positive. Also, the MACD line is hovering well above the 9-day EMA.

The 14-day and 9-day Relative Strength Index of the index hovering in the neutral zone and trending towards the overbought zone.

Also, since October 28, 2019, the date of general election announcement made by the British PM Boris Johnson, the mid-cap gauge FTSE 250 ended 17 times higher and 12-times lower against their respective previous closing prices, which reflects that the Ups have surpassed Downs with Up/Down ratio at 17/12 or 1.5. The British Pound also ended 17 times higher since the general election announcement and 12 times lower against the respective previous closing prices.

This reflects that the domestic assets of the UK as well as its currency have performed well since the general election announcement. This could be because of higher optimism over the potential victory of the PM Johnson in the upcoming elections, which would bring political stability in the UK and Brexit saga would also get resolved.

However, the actual outcome has yet to come, which will drive future direction the UK's domestic asset prices.