FTSE 100 and Euro Stoxx 50 race higher to erase losses after Brexit deal

FTSE 100 and its European counterpart Euro Stoxx 50 (SX5E) both raced higher on Wednesday and Thursday as investors rushed to price in a historic trade deal between the United Kingdom and European Union, as well as higher-than-expected UK GDP print.

Fundamental analysis: Historic day; Economic recovers

Two sides announced yesterday they have reached a deal on post-Brexit trade modalities. The final agreement ended months of disagreements over fishing rights and future business rules.

On the other hand, the EU chief negotiator, Michel Barnier, said:

The deal will be used as a legal basis with new rules on how the UK and EU will co-exist, work and trade together. The full document - still to be released - is believed to have over 1,000 pages.  

The deal now must pass both Parliaments for ratification, with the opposition Labour party likely to vote to support the deal. However, some analysts believe Labour shouldn’t back the deal.

Economy still recovering

The latest data showed that the U.K. economy has continued to recover from the coronavirus crisis quicker-than-expected in the third quarter. However, new lockdowns in the country might result in a new recession.  

Gross domestic product (GDP) surged by 16% during the period between July and September,  compared to the previous estimate of 15.5%. However, this growth did not compensate for the 18.8% decline in Q2. 

The U.K. economy contracted more than most of the other EU members during the pandemic due to a longer lockdown and only Italy has a bigger death toll in Europe. The British government imposed stricter restrictions again after the discovery of a new coronavirus variant in the country which appears to be even more transmissible. 

London-based economic research consultancy Capital Economics pointed to risks of a potential, double-dip recession if these tougher restrictions remain in 2021.

The country’s economy is set to contract again in the fourth quarter as a result of concerns regarding the December 31 deadline for a Brexit trade deal between Britain and the European Union. 

Yet the consultancy emphasized that increased savings rate in the households “provides optimism that as long as vaccines are effective and widespread, GDP will stage a strong rebound in the second half of next year.”

According to official data released on Tuesday, the U.K. economy was 8.6% down compared to the same period last year. 

The data also showed that household incomes climbed in Q3 as people returned to work after temporary layoffs. On the other hand, consumer spending surged by nearly 20%. 

Technical analysis: FTSE 100 and Euro Stoxx 50 race higher to recover losses

FTSE 100 price initially dipped nearly 4% on fresh coronavirus concerns and tougher lockdown measures imposed. The uncertainty over the Brexit deal further helped to weaken the risk sentiment. This helped sellers to push the FTSE 100 price to 6316, a new 4-week low. 

However, the announcement of the trade deal as well as better-than-expected GDP print pushed the index higher to now trade nearly unchanged on the week. The buyers are now likely to target levels above 6650 next, with 6800 seen as the first major target.

Similarly, Euro Stoxx 50 has managed to erase losses and swing into the green after the Brexit trade deal. The initial losses of nearly 5% have been erased, as buyers work towards their next targets near 3700. 

The 2020 highs sit around the 3870 mark while any pullback is likely to end at 3450.

Summary

The recovery process in the British economy was quicker-than-expected in the third quarter but newly-imposed lockdown poses a risk of a deeper recession in 2021. In the meantime, the week behind us was marked by a historic trade deal agreed by the European Union and UK.