The outgoing week has been filled with excitement and tension for European and UK financial markets. From the panic sell-off on Tuesday, to the nervous consolidation on Wednesday, to the tentative recovery on Thursday and Friday, this week has seen it all. Here’s where the chips fell.

As traders returned from a long weekend in both the UK (Bank Holiday) and the United States (Memorial Day), they were greeted back to the markets by the unwelcome news of a full-blown constitutional crisis in Italy.

To quickly recap the situation, popular unrest against EU fiscal austerity rules has been brewing in Italy for a long time until it finally manifested itself in the electoral defeat for the ruling party to the benefit of a group of anti-establishment politicians that have banded together into a decidedly EU-unfriendly coalition.

While the populist group submitted a host of Eurosceptic ministers for approval (with candidacy of Finance Minister Paolo Savona producing a particularly heated reaction), the response from Powers That Be made the situation even worse. Not only was the coalition cabinet rejected by the Italian President, but several EU officials issued rather unguarded remarks with regards to the cabinet choices. Italian voters and the financial markets were not amused and the latter responded with a massive sell-off of equities across the continent.

If that wasn’t enough, but, at roughly the same time, OPEC and Russia decided to announce that they are contemplating an end to the voluntary oil supply caps that were introduced several years ago and led to oil prices appreciating to over $80/barrel. With producers indicating that the restrictions might end, oil prices plummeted, taking the shares of UK Index Energy companies together with them.

And that wasn’t even the end of it. With negotiations between China and United States having stalled over the potential tariffs on Chinese imports and the lack of compromise in the incoming trade war, companies with significant exposure to China (i.e. Metals & Mining sector) were hit by the toxic combination of stronger US Dollar and uncertainty regarding Chinese trade restrictions.

So, all in all, an exciting week for big UK Index components. Think of the sectors affected and despair! Banks (Barclays, Lloyds, HSBC) suffering from exposure to Italian constitutional crisis. Energy (Royal Dutch Shell, BP) feeling the heat of lower oil prices. Miners (Rio Tinto, BHP Billiton, Anglo American) under the gun of US-China trade tensions. Feels like a perfect storm for the biggest UK Index contributors, doesn’t it?

Or was it? Are things really that bleak? It turns out, UK 100 and its heavyweight constituents are far more resilient than some panicked investors were giving them credit for. As the nerves of Tuesday sell-off have cooled down, investors started reassessing the situation and found out that they can safely step away from the precipice. Banks have rebounded strongly after Italian political tensions have receded and oil prices came back from their lows when it became obvious that Russia and Saudi Arabia were not entirely on the same page with regards to supply cuts. UK 100 is back from the lows of the week to once again trend upwards and potentially challenge the all-time highs of 7903 points.

The lesson of this week for investors is three-fold:

• Keep a tight hold on your positions and have disciplined risk management rules in place. Tighten your stop-loss limit and don’t rush in and out of trades based on rumours and fear-mongering.
• Take news in stride. Don’t overreact to geopolitical situations just in the basis of news headlines. Listen to prudent analyst advice, but assess each situation in context. One day there is a sell-off, next day there is a rebound. There is potential to profit from both.
• Identify sectors affected and stay away, even if for a short time. If UK Index Banks are exposed to Italian political risks, perhaps it’s best to get out. With Banks returning on top at the end of the week, there is always time to get back in action.

Here at Accendo Markets we are dedicated to helping investors weather such topsy-turvy weeks. You can join our community of traders by signing up to our award–winning research that you can receive directly into your inbox.

Artjom Hatsaturjants, Research Analyst at Accendo Markets, 1 June 2018