It’s fair to say the UK’s UK 100 has essentially brushed aside the Brexit fears that gripped it on the day the UK voted to leave. However it’s been driven back up by the big defensive stocks and some multinationals which have enjoyed FX translation benefits since they conduct a lot of their business in US Dollars. This is shedding some light as to why the is still struggling – its constituents are much more UK-focused. Investors seeking share price gains have therefore focused predominantly on UK 100 constituents.

Now that we’ve had promises of economic stimulus from the Bank of England Governor Mark Carney, who alluded to a possible rate cut and a summer stimulus package if markets required it, it’s evident that sanguine traders and investors alike are showing renewed optimism for a further rally to build on the 900pts we’ve already seen post-Brexit vote. With economic stimulus, the Pound Sterling could be set to weaken further, which could in turn imply continued support for US Dollar-exposed stocks. In fact, the BoE’s Monetary Policy Committee (MPC) meets next week, which is really exciting as that means we could well see these much talked of stimulus measures implemented any time now. Will interest rates be cut, or will we see another round of Quantitative Easing (QE)…or both?! As recent years will attest to, equity markets have been spurred with either and or both.

While economic stimulus could continue to bolster those stocks that are already outperforming, it could also engender a rebound in some of the worst hit shares on the UK 100 – some of which have fallen as much as 60% since the referendum result and, two weeks further on, still trade lower by as much as 40% compared to where they were on 23 June. Banks and house builders have experienced significant devaluations in their shares prices on concerns that global growth could slow and that the UK’s property market could top out with the all-important foreign investment seen drying up after the UK leaves the EU.

Pre-emptive action initiated by 7 Real Estate Investment Trusts (REITs) (7 thus far, but more could be set to act in the near term) to prevent panic selling in the market has already led to some decent rebounds in UK house builders over the past few days. Yet there’s still some way to go for them to regain their pre-Brexit vote levels, potentially large percentage moves that many might interpret as a good opportunity.

That, coupled with the extent to which these stocks could have been sold in a panic (i.e. oversold), means we could be set for some incredible price action as soon as next week, as investor confidence catches a bid and the flow of capital from risk-off back to risk-on is initiated. We’ll be watching proceedings closely for our clients, enabling them to react accordingly before much of the wider market. We can keep an eye out you too – simply access our daily research and trade ideas here.

Have a great weekend!

Sam Alnakkash, Trader (8 July)