What Is the Impact of Brexit Trade Talks on The Financial Market?
On 1st January 2021, the agreement between the United Kingdom and European Union to keep many things the same for 11 months after Brexit, came to an official end.
The UK officially left the EU back at the beginning of the year 2020, but there was a period of time agreed to allow for nation's leaders to negotiate a trade deal (or result in no trade deal) before any new regulations were put in place as a result of said deal.
If there was no trade deal reached by December 31st, trade would have then been governed by World Trade Organization rules, where both sides could place import taxes on each other's goods, potentially affecting prices and the financial markets. But on 24th December 2020, an agreement was reached that, in terms of trade, the UK will have tariff-free access to the EU's market, meaning there will be no import taxes on goods crossing the borders. However, some new checks will be introduced.
For Northern Ireland, there has already been an agreement reached to eliminate any tariffs on goods traded between them and the UK. Even if a no-trade deal was decided, this agreement would have still remained in place.
But what effects have there been on the financial markets, with the trade talks back in December between the UK and EU being taken right to the wire, and an agreement only being reached on Christmas Eve?
British Stocks
There has been a strong start in the London stock market for 2021, with the conclusion of the UK and EU trade deal, and the first trading day since Britain formally left the EU's single market and customs union.
However, the uncertainty that the prolonged trade talks created has left some scars on the British financial markets. With the effects of both COVID-19 and Brexit, British stocks were the worst-performing major market in 2020, with reports also showing that the FTSE 100 index fell 14.3% over the year, marking its worst performance since 2008. This has urged analysts to recommend traders invest in undervalued UK stocks, with the hope that the deal agreed will see a future rise in price of British assets.
Some of the optimism that the trade deal will see a rise in investments of British stocks, is marred by the overall lack of economic recovery. Investment strategists have also implied that the underperformance is also due to foreign investors moving away from the UK to destinations that instead embrace globalisation, as Britain may have been excluded from the world's largest single market area. UK investors have also moved to Japanese and American markets for more lucrative investments.
Experienced investors are constantly looking for ways to protect and diversify their portfolio. With there still ambiguity in price movement of British stocks and market volatility, investors are looking to online trading platforms such as Skilling, where they can invest in a Contracts for Difference (CFD) based on their predictions of the rise and fall of various assets, and also help towards preventing potential losses when owning the underlying asset as well. For example, if an investor believes that the share price is likely to fall due to the Brexit trade deal, they can make a profit from CFD trading based on this position, and if the price then increases, they can just close the trade.
The Strength of The Pound
Despite the agreement reached in December 2020, there have been some long-term effects from Brexit and the prolonged trade talks, as the British currency remains 20% below its long-term worth, with many experts believing it will not fully recover. In the short term, the Pound has however, reached its highest value against the Dollar, since the Brexit referendum back in 2016.
At the time of writing, the sterling had increased by 0.3% against the Dollar, whilst up by 0.5% against the Euro also, showing a positive reaction to the last-minute trade deal agreed between the UK and EU. The volatility of the Pound has seen investors turn to CFD trading in Forex instruments, likewise with British stocks and shares, to offset any potential loses with price movements, as well as to take a position on the predicted price movements of the currency.
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With both the negative impact of COVID-19 and Brexit last year, and then the news of a trade deal agreement and roll out of vaccines, the British financial markets have certainly seen its ups and downs, and many investors will be interested to see what the rest of 2021 will bring.