While the majority of markets dipped during October, Brazil’s stocks rose on a wave of optimism following the election of the opposition Workers Party ‘market-friendly’ Jair Bolsonaro to the Brazilian presidency. Globally, however, stocks fell, fueled by falls in the so-called US tech-driven ‘FAANG’ stocks, earning the month the title ‘Red October’.

During October the S&P gave up everything gained over the year, the FTSE All-share finished 7% lower than the start of the year, Europe dropped almost 6% and, despite its strong position during September, the Nikkei fell 9%.

In the UK, markets continue to hold their breath for Brexit terms clarity as the November deadline draws ever closer.  Italian markets adversely reacted to the rising temperature of debate with the EU following the EU rejection of the Italian projected 2.4% GDP budget deficit.

German and French market confidence decreased as Angela Merkel resigned as CDU party leader. The generally volatile socio-political landscape also drove Belgium to produce the worse returns and dampened down the relatively buoyant Nordic markets.

Overall during October, the best-performing markets were the US and the UK with Hong Kong being the worst.  Except for Brazil, emerging markets continued to be held back by the strengthening US dollar. Mexico fell furthest during the month.

Given the current return to levels of volatility seen earlier in the year, investors are understandably more aware of the downside of equity and bond markets, despite the US still showing a strong economy and some of the pressures to sell abating towards the end of October.

Brexit update

There has been much speculation recently around Brexit and the political landscape that might emerge from the melodrama surrounding the issue.

Last Wednesday, the UK Cabinet approved a 500 plus page draft European Union Withdrawal Agreement.  The likelihood of Parliament approving the agreement decreased following almost immediate resignations from Dominic Rabb, the UK’s Brexit Secretary and two senior ministers, catalysing cabinet disarray and press speculation about additional resignations.

Given the general aversion to a “No Deal” outcome, what remains seems to be a choice between the draft agreement, a general election or a second referendum. Those within Parliament may, of course, decide to vote the deal through rather than face the electorate.

What happens next?

Next steps will be discussed at the special EU Council summit on November 25. The summit is expected to focus on a “No Deal” contingency. Any alternative is down to the UK side to determine, although Mrs May is unlikely to put the draft agreement to an EU vote if there is a high probability of defeat.

While the remaining alternatives would seem to be to stop the clock or extend Article 50 negotiations, interest may turn to the UK staying in the European Economic Area for a time with a temporary customs union added on, rather like Norway.

Another option, albeit a long shot, would be the government offering to append a clause in the approval bill allowing for final agreement via referendum.

The effects on sterling and the market

Throughout the Brexit process, sterling price action has been the main barometer of assessing market risk with sterling volatility affecting equity prices, leading to the FTSE100 large-cap stocks outperforming more domestically focused small to mid-cap stocks in the short term.

A ‘Norwegian like’ agreement might give businesses greater short-term certainty, but no long-term clarity and may allow sterling to recover lost ground for a limited time. Appending a clause allowing for a final agreement by referendum would again benefit sterling temporarily but then spike volatility around uncertainty on final results.

The least favourable outcome for sterling is a no-confidence vote against the UK government; this is perhaps less likely before March 29 next year when this could lead to a general election.  In a general election, a Corbyn government could see sterling tumble to lower levels than those following the 2016 referendum.

Whatever the outcome of current events, until some of the uncertainty has been removed we can expect heightened sterling volatility to continue.