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  1. Home
  2. / Investing
  3. / Stocks

UK Politics and Sterling Are More Volatile Than One Might Think

Rather than try to understand the inner workings of politicians, focus on earnings and fundamentals.
By MALEEHA BENGALI
Jan 16, 2019 | 06:33 AM EST
Stocks quotes in this article: NFLX

One would think a coup d'état, or churning of governments every six months, was something one would be privy to observe only in rather contentious politically unstable developing nations. One seriously underestimates the theatrical performance and comedy of errors while watching the UK parliament debates.

Now that Netflix (NFLX) has raised its prices by a further 18%, perhaps viewers should consider another viewing alternative -- which offers same amount of entertainment at absolutely no cost. Although I doubt UK parliament blows $8 billion in cash per year to garner its viewing content. But it clearly does not have about 137 million viewers globally. Truth shall reveal itself this Thursday as Netflix reports its subscriber's numbers when it reports its earnings, perhaps not best to switch channels just yet for more fireworks.

Theresa May's Brexit deal suffered the worst defeat in parliamentary history as it was defeated by 230 votes. The loss was not a mystery. The extent of the loss was what caught most by surprise.

Strategically enough, Labour party leader Jeremy Corbyn has tabled a motion of no confidence in the government. Yes, the house gets to vote again as to who retains majority.

In all this shuffling, the UK public are the ones suffering, as their leaders fight and argue like petulant children. May has less than a day to fight for her current job. Given the DUP has said that it will stand by its agreement with the Tories, a defeat for May is no guaranteed outcome. If the government wins, May will stay and pursue yet another deal. The tedious and interminable process of Brexit divorce shall continue. But if she loses, the government will fall. There is a period of 14 days in which a new government can be formed.

One cannot make this up, even if one tries. In the 71-year history of Pakistan, the country went through three successful coup d'états and several failed attempts -- plus, in the last twenty years, no single government has actually managed to complete its entire term without being ousted by the opposition. Since 2016, the UK has certainly given even Pakistan a run for its money. One can argue the merits of a referendum in the first place. Google reported a record number of searches for "What is EU?" prior to the Brexit vote and yet we leave this to average person to vote? One wonders if democracy is a failed institution or one just tailored to work for the elite.

The Sterling has fallen 15% since the vote, killing the financial and physical assets in the UK. Yesterday after the vote, Sterling rallied 100 basis points on hopes of a second referendum or even a new government. So much negativity had been priced into the UK market, it was a knee jerk reaction to the upside. As sterling rallied vs. the dollar, this took up other currencies like the euro and yuan, as well.

There was no connection whatsoever, but markets used that as an opportunity to bid up all asset classes yesterday evening -- including oil and copper. The S&P 500 rallied, threatening to break above the crucial 2600 level -- where most traders are short given the disastrous Q4 2018 earnings that are being released and global economic slowdown evident in the macroeconomic data.

Strategy in the market is changing day by day. With Trump tweeting "talks are going very very well," then Lighthizer suggesting "little progress" being made on structural issues and Intellectual Property rights, with China pumping liquidity into the overnight repo market, the market is all over the place. There is no clear direction. Bulls and bears take turns ruling each day, leaving us investors vexed watching our portfolio performance.

The Sterling faces an incredibly binary outcome currently. If a second referendum took place with a vote to stay in, sterling (or cable, in some circles) could potentially rally back to the $1.40s, where it was prior to the vote. If the government loses its no confidence vote, it is quite possible sterling can even fall down to $1.15 or lower. To put it in layman's terms, the UK is in a state of total chaos. Even banks are not trading sterling/dollar, given how volatile it is currently.

What was once the Great British Empire at its height in 1922, is now reduced to a tiny island. 

Q4'18 earnings are off to a horrendous start with the likes of JP Morgan ($JPM) Wells Fargo ($WFC), Citigroup ($C) all disappointing, yet the market is grinding higher? However, it is on very low volume. One can argue that there is little conviction in the move higher, just weak hands covering their positions. One should be wary of reading too much on this "bounce" since December and certainly not follow the claims of sensationalist bulls suggesting the market has bottomed. We are still in the eye of the storm, one is better suited to be in cash waiting calmer waters.

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TAGS: Investing | Markets | Politics | Stocks | World | Europe | U.S. Equity | Global Equity

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