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Home / Special Reports / Triggering Article 50: How will stock markets react?

This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

10 March 2017

Triggering Article 50: How will stock markets react?

The ‘B’ word is coming!

The day after the EU referendum was one that few could have predicted. Shares fell drastically, only for some to recover losses by the afternoon. Some traders had a field day; some feel like they may have missed out. However, crucially, the result of the referendum means that we now find ourselves in as yet uncharted territory.

With Article 50 looming and Brexit negotiations beginning, the UK could see similar once-in-a-generation trading opportunities arise. We are in an unprecedented period for the UK economy and it couldn’t be more exciting.

This report will not only provide you with an outlook for what to expect from UK-EU negotiations, but also an in-depth analysis of the immediate aftermath of the referendum result and six stocks that could see their share prices move significantly over the course of the next two years as Brexit is played out before the world.

What happens once Article 50 is triggered?

When Article 50 is triggered in March, the door will be opened for the government to negotiate its terms for leaving the European Union, which will include subjects such as trade, determining legal jurisdiction, travel and working rights of UK and EU citizens in the others’ respective territory and, of course, access to the European Single Market, with all 27 EU member states needing to agree on the conditions of Britain’s exit of the bloc.

All of these issues are likely to take the headlines for the next two years, with news likely to be provided almost daily on the progressions of talks – no doubt with some rumours thrown in for good measure! Brexit minister David Davis has told MPs that there are likely to be ‘many, many, many’ votes taking place over that period, so you can be sure that there will be disagreements aplenty in UK parliament. Business as usual, but with added spice.

Subsequently, we could see the UK Index , Pound Sterling and the Euro move significantly in reaction to the flavour of the day, whether that includes agreements being reached or some talks becoming in danger of falling through.

Article 50 is bound by a set timeline, with the process allowed to take a maximum of 2 years. Although Theresa May is hoping that negotiations can be completed in an 18-month timespan, once the deadline is reached, if no final deal has made, the UK will leave the bloc without any negotiated deal and will revert to WTO trade rules.

As the many pieces of the Brexit puzzle come together, we’re here to help you find attractive trading opportunities that could be just around the corner, no matter what the mood of the UK government or the EU.

Over the page we take an in depth look at the hours, days and months that followed the referendum and outline the possible economic implications that Article 50 could bring along once triggered in March.

Page: 01

Referendum Rewind: What was the reaction to Brexit?

June 24, the Friday following the referendum, was a day that will live long in the memory of many investors and traders alike, as the first big shock of 2016 made its mark on financial markets.

The surprise result saw an incredible day of trading on the London Stock exchange, with some stocks falling as much as and a 50% of their opening share price on the day, a feat almost unheard of on a large scale, as names such as Dixons Carphone (58%), Next (50%), Persimmon (42%) and Associated British Foods (45%) suffered. When the dust settled, these blue-chip UK stocks finished the day having experienced one of their hardest sessions in history.

There was no let up as markets reopened the following Monday. Seven stocks all halted and put into auction having fallen over 8% from their opening price, including Banks Barclays (-10.4%), RBS (-14.5%), Housebuilders Taylor Wimpey (-12.3%), Berkeley Group (-10.6%), Crest Nicholson (-10.3%) and Barratt Developments (-12.1%), while Airline EasyJet was the worst affected stock, eventually falling by 19.4% on the day.

As you can see above, the sectors most impacted by the vote were mostly UK-focused or companies that earn profits denominated in Sterling; UK Airlines, Banks, Housebuilders and Retailers in particular were targeted.

Conversely, however, stocks that earn their profits in Dollars were perversely boosted by the positive translational gains; multinational corporations, exporters and producers of buck-denominated commodities.

Now, 6 months down the line, the UK Index has since seen its longest run of record intraday and closing highs in history, and has flirted with 7400. Could we see moves of this proportion again once Article 50 is triggered?

Lightning strikes twice: Will Article 50 mirror Brexit?

After the triggering of Article 50, the stock market reaction will unlikely be as sharp and immediate as the referendum aftermath – after all, unlike the referendum result, it won’t come as a surprise – however, the divorce negotiation will likely see financial markets be continually influenced by Brexit over the next two years.

The focus for markets will be on what concessions the EU will allow the UK and, as a result, how many of her objectives the PM is able to achieve from the negotiations. The new UK-EU deal could see huge differences in the way Britain deals with the rest of Europe, hurting some companies while benefitting others.

Even more interestingly, once completed, the UK is free to negotiate independent trade deals with other major nations. Already Australia, New Zealand and the US have expressed interest in making new trade deals. The latter, in particular, could greatly affect the UK economy as the “special relationship” breaks new ground.

As a consequence, we are likely to see UK stocks and Pound Sterling FX pairings being impacted considerably by the ongoing stream of Brexit news. Sectors especially influenced will likely include Finance – most notably Banks and Insurers – and Retailers – both Supermarkets and non-food retailers – amongst others

With the Brexit vote still fresh in the memory, we have picked six UK 100 stocks - three that reacted negatively and three that reacted positively - that could offer you a trading opportunity once Article 50 is triggered!

Page: 02

Notable Negatives: Could these stocks find themselves falling once again?
1) Aviva (AV.)

Aviva PLC (-)

Will shares break out from 520p resistance or pull back towards the referendum day lows of 290p?
  • Has a significant European operating base, could a Hard Brexit create difficulties?
  • Post referendum rally sees successful challenge of 2-year resistance at 500p
  • Momentum and MACD approaching zero from positive
  • Directional Indicators converging bearishly

 

Broker Consensus: 52% Buy, 39% Hold, 9% Sell

Bullish: Day by Day, Buy, Target 615p, +20%, (9 Feb)

Average Target: 502p, -1.8% (7 Mar)

Bearish: Exane BNP Paribas, Underperform, Target 400p, -22% (16 Feb)

 

N.B. All pricing and consensus data was sourced from Bloomberg on 7 March. Please contact us for a full, up to date rundown.

Page: 03

 2) easyJet (EZJ)

easyJet PLC (-)

Will shares break out to 1775p 2016 highs or pull back towards 4-year lows of 850p?
  • Could lose access to the European Common Aviation Area in a Hard Brexit scenario
  • Having fallen over 500p after the referendum, has since been unable to overcome falling highs resistance
  • Directional Indicators showing no bias after price falls back below 1000p
  • MACD and Momentum virtually flat

 

Broker Consensus: 26% Buy, 56% Hold, 18% Sell

Bullish: Jyske Bank, Buy, Target 1350p, +42% (24 Jan)

Average Target: 1014p, +6.4% (7 Mar)

Bearish: Panmure Gordon, Sell, Target 820p, -14% (24 Jan)

 

N.B. All pricing and consensus data was sourced from Bloomberg on 7 March. Please contact us for a full, up to date rundown.

Page: 04

3) Taylor Wimpey

Taylor Wimpey PLC (-)

Will shares break out to 2016 highs of 210p or pull back towards the referendum lows of 110p?
  • One of the biggest losers on day after referendum at -28%, falling by a further 15% the following Monday
  • Post referendum recovery rally to pre-Brexit levels after successful challenge of 175p intersecting resistance
  • Directional Indicators diverging bullishly; MACD and Momentum positive
  • Stochastics and Relative Strength Index overbought

 

Broker Consensus: 63% Buy, 31% Hold, 6% Sell

Bullish: Peel Hunt, Buy, Target 210p, +12% (28 Feb)

Average Target: 189p, +0.7% (7 Mar)

Bearish: Liberum, Hold, Target 150p, -20% (1 Mar)

 

N.B. All pricing and consensus data was sourced from Bloomberg on 7 March. Please contact us for a full, up to date rundown.

Page: 05

Possible Positives: Could Article 50 provide a referendum-repeating boost?
1) BP (BP.)

BP2 PLC (-)

Will shares return to 2-and-a-half year highs of 520p or pull back towards 2016 lows of 310p?
  • Any fall in Sterling has positive translational effect for producer of Dollar-denominated Crude Oil products
  • Rose 2% on day after referendum, with gains for June totaling 22%
  • Stochastic oscillator overbought; MACD and Momentum positive
  • Directional Indicators showing no bias as price close to 12-month rising support

 

Broker Consensus: 41% Buy, 59% Hold, 0% Sell

Bullish: Barclays, Overweight, Target 625p, +35% (1 Mar)

Average Target: 515p, +11% (7 Mar)

Bearish: Natixis, Neutral, Target 400p, -14% (8 Feb)

 

N.B. All pricing and consensus data was sourced from Bloomberg on 7 March. Please contact us for a full, up to date rundown.

Page: 06

2) Fresnillo (FRES)

Fresnillo PLC (-)

Will shares head back to 3-year highs of 2050p or pull back towards post-referendum lows of 1000p?
  • Gold price spiked on referendum result, could Article 50 provoke more (bullish for gold) uncertainty?
  • Having bounced from 1100p support, turning back after failed challenge of 1600p
  • Momentum turned negative, stochastics approaching oversold
  • Directional Indicators diverging bearishly

 

Broker Consensus: 19% Buy, 62% Hold, 19% Sell

Bullish: Goldman Sachs, Attractive, Target 2000p, +46% (7 Jul)

Average Target: 1446p, +5.9% (7 Mar)

Bearish: RBC Capital Markets, Underperform, Target 1090p, -20% (28 Feb)

 

N.B. All pricing and consensus data was sourced from Bloomberg on 7 March. Please contact us for a full, up to date rundown.

Page: 07

3) National Grid (NG.)

National Grid PLC (-)

Will shares break above 1150p or pull back towards 2017 lows of at 890p?
  • Could Article 50 pave the way for a new UK-US trade deal, where earns 23.5% of profits?
  • Price close to ceiling of 4 month rising channel
  • Stochastic oscillator recovering from overbought; Momentum and MACD turned towards zero
  • Directional Indicators showing no bias

 

Broker Consensus: 33% Buy, 39% Hold, 28% Sell

Bullish: J.P Morgan, Overweight, Target 1100p, +13% (14 Dec)

Average Target: 956p, -2.0% (7 Mar)

Bearish: Societe Generale, Sell, Target 790p, -19% (16 Jan)

 

N.B. All pricing and consensus data was sourced from Bloomberg on 7 March. Please contact us for a full, up to date rundown.

Page: 08

Want to take advantage of the above opportunities right now?

Whether you see UK stocks going up or down for the remainder of the year, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs: Like shares, but more flexible

Stockbroking Ticket

CFD Ticket

The example above shows how buying 1,450 shares in British Land @ £6.90 requires an outlay of around £10,000 plus commission (see left-hand box), while the same exposure via a CFD requires about £500 plus commission (see right-hand box). If a trader invests in British Land, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to the BLND shares - some of that capital could be put to good use elsewhere in the markets. (Source: IG, Prices indicative)

CFDs are leveraged instruments, but you don’t have to use the leverage

If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up just £500 (note that overnight financing costs will still apply). The remaining £9,500 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!

What’s your view?

Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.

Page: 09

The Accendo Markets Research Offering

Does your current broker’s morning report tell you all you need to know about yesterday’s news? If so, how is it offering you anything more than the plethora of information already available on the internet?

We’re proud that our morning editorial has become a hot commodity in the City, its content quoted daily by the journalists that are writing the news everyone else will be reading later in the day, if not the next. Our morning report tells you what’s driving the market at that moment and what to look out for in the day ahead.

If a company has reported earnings before the market opens, we’ll tell you why the shares are called to open up or down in relation to that announcement.

As well as the Morning Report, signing-up to Accendo Markets Research & Trade Ideas offers you the chance to receive the following publications:

  • Another Level: A selection of key level alerts on various stocks.
  • Index Focus: A selection of key level alerts on the major indices.
  • Trade Alerts: Trading ideas from our analysts. What do they think is likely to move?
  • Macro Calendar: Live market-moving data, breaking news as it happens
  • Week in Advance: A summary of next week’s key events. Is there a trading opportunity there for you?

To ensure you can act as quickly as possible, you’ll receive an email with a link to the latest publication as soon as it’s released. You can unsubscribe from these emails at any time.

Based on a wealth of experience, gained from both large and small institutions, our Research and Trade Ideas are produced in-house. Our team of dedicated professionals comprises both analysts and traders, drawing upon a wide range of resources and methodologies.

Our aim is to provide you with the manpower and expertise you need to help you clarify, interpret and capitalise on the ever-growing volume of market information.

The journalists don’t pay for it and neither do you, so why not give it a go? You’ve nothing to lose and perhaps a little more to gain… Subscribe Today!

Page: 10

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Page: 11

This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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