(Bloomberg) -- The Halloween deadline for Brexit has the qualities investors hate most in market events -- unpredictability and uncertainty.
In a month when jitters already abound on global growth and trade, there’s still no deal in sight for the U.K. With Prime Minister Boris Johnson insisting the country plans to exit on Oct. 31 even as EU officials remain unconvinced by proposals put forth so far, it could all come down to the wire. So far, an extension and early general elections have high odds in strategists’ scenarios, which leaves traders of U.K. assets in a wait-and-see mode.
Deal or no-deal, it appears U.K. stocks are not expected to come out as winners. Even if the two sides pull off the near-impossible feat of reaching an agreement before the deadline, the big winners would be euro-area stocks, JPMorgan strategists said earlier this week, partially because the exporter-heavy FTSE 100 would be penalized by the soaring pound.
Should the U.K. leave the EU without a deal by Oct. 31, sterling may fall “through 1.15 or even 1.10” versus the dollar, levels not seen since 1985, Jefferies wrote in a note yesterday.
Faced with extreme scenarios, Bank of America Merrill Lynch strategists recommend a volatility play. They forecast the pound will depreciate 15% against the dollar in case of a no-deal Brexit, while moving up 10% in case of a deal. In both situations, they expect European equities to move in the same direction as sterling, and the Euro Stoxx 50 to “realize more than the FX-dampened FTSE in the lead up to and following such Brexit scenarios.”
In fact, the risk premium associated with U.K. equities has been rising much faster than that of the euro area since the referendum, and remains in upward trend.
Credit Suisse economists shared their view on Monday that an extension of Article 50 is the most likely scenario, but the path to get there could require “increased stress” in the second half of October. They price the odds of a no-deal Brexit at 20% and see a 90% chance of a general election by the end of the year. This continuous political stress could weigh on sterling and U.K. assets, they say.
In the end, prolonged uncertainty seems to be the most painful scenario, as it drags on the economy and makes planning difficult, with consequences for the job market as well. Although the unemployment rate is hovering near its lowest since the 70s, U.K. staffing companies warned yesterday that a lack of clarity around Britain’s departure from the European Union has continued to hurt hiring trends. No surprise then that U.K. business confidence has been sinking.
That leaves U.K. stocks as a trade for the brave, or for the value hunter. Sustained worries about Brexit have already dragged the FTSE 100 to near its cheapest level relative to the Euro Stoxx 50 in 13 years, prompting strategists at Citi and Pictet to recommend the shares on valuation grounds.
In the meantime, Euro Stoxx 50 futures are little changed ahead of the European open, while S&P 500 contracts are up 0.2%.
SECTORS IN FOCUS TODAY:
Watch European exporters given the deteriorating relations between China and the U.S. over the past 48 hours, with the U.S. cracking down on China over human rights and the National Basketball Association running afoul of Chinese sensibilities.Watch for luxury stocks as markets may position ahead of French luxury conglomerate LVMH reporting third-quarter sales after the close and may give a sense of how much the industry has been affected by the unrest in Hong Kong.
“Markets have rallied in 3Q, but not on earnings prospects. Following the sharp cuts to EPS growth estimates, now at -4% y/y in Europe and -3% in the U.S., soft 3Q results may not come as a surprise to investors,” Barclays strategists write in a note. “However, the September market rebound to near ytd highs reduces the cushion, in our view, in particular for cyclicals.”
NOTES FROM THE SELL SIDE:
Following a sustained period of downgrades and de-rating for the U.K. pub and restaurant sector, there appears to be some confidence returning as reflected in an upturn in consolidation, which may continue to be a catalyst, Jefferies says, initiating on 6 stocks.While DNB, SEB and Nordea remain buy rated, the banks are not estimated to show any “superior outperformance” in the upcoming 3Q results, Handelsbanken says in note.
COMPANY NEWS AND M&A:
GAM Said to Halt Sales Talks With Suitors Including GeneraliCredit Suisse Weighs Return to U.S. Private Banking After ExitRenault Chairman Wants to Start Search for New CEO: FigaroBoostheat Paris IPO Priced at EU14/Share vs EU14-EU17 RangeDBV Technologies Prices $125M of Shares, Closing Seen Oct. 11Takeaway Third Quarter Orders 41.6 MlnKappahl 4Q Operating Profit Rises to SEK108 MlnCropEnergies 2Q Operating Profit EU28.6 Mln Vs. EU9.6 Mln Y/yBKW Acquired Germany’s LTB Leitungsbau; No Financial DetailsAMG Buys International Specialty Alloys Assets From KennametalBourbon: Takeover Offer Made by A Co. Owned by French Banks
TECHNICAL OUTLOOK for Stoxx 600 index:
Resistance at 395.1 (July high); 397.9 (June 2018 high)Support at 380.6 (50-DMA); 376.6 (200-DMA); 365.5 (50% Fibo)RSI: 41.6
TECHNICAL OUTLOOK for Euro Stoxx 50 index:
Resistance at 3,573 (July high); 3,596 (May 2018 high)Support at 3,436 (50-DMA); 3,403 (61.8% Fibo); 3,363 (200-DMA)RSI: 48.2
MAIN RESEARCH AND RATING CHANGES:UPGRADES:
Cellnex upgraded to outperform at MainFirst; PT 48 EurosDWS raised to overweight at JPMorgan; PT 34 eurosKBC Group raised to buy at Jefferies; PT 70 eurosVeolia raised to overweight at JPMorgan; PT 25.50 euros
HSBC cut to underweight at Morgan Stanley; PT 540 penceInwido cut to hold at Handelsbanken; PT 56 kronorNetcompany cut to hold at ABG; PT 280 kroner
4imprint rated new hold at HSBC; PT 2,875 penceAj Bell rated new sell at Liberum; PT 295 penceAscential rated new buy at HSBC; PT 460 penceAvast rated new buy at HSBC; PT 455 penceBenchmark Holdings rated new buy at HSBC; PT 61 penceBlue Cap rated new buy at GSC Research; PT 23 eurosBlue Prism rated new hold at HSBC; PT 1,100 penceDart Group rated new buy at HSBC; PT 1,050 penceDomino’s Pizza Group rated new underperform at JefferiesEquiniti rated new buy at HSBC; PT 295 penceGreene King reinstated hold at Jefferies; PT 850 penceHargreaves Lansdown re-initiated buy at Liberum; PT 2,125 penceIntegraFin rated new hold at Liberum; PT 390 penceJ D Wetherspoon reinstated hold at Jefferies; PT 1,590 penceKeywords Studios rated new buy at HSBC; PT 1,700 penceMarston’s reinstated underperform at Jefferies; PT 90 penceMitchells & Butlers reinstated buy at Jefferies; PT 530 penceNucleus Financial Group rated new hold at Liberum; PT 150 penceQuilter rated new buy at Liberum; PT 159 penceRWS Holdings rated new hold at HSBC; PT 600 penceRestaurant Group reinstated buy at Jefferies; PT 170 penceRicardo rated new hold at HSBC; PT 630 penceRobert Walters rated new buy at HSBC; PT 615 penceSThree rated new buy at HSBC; PT 350 penceSavills rated new hold at HSBC; PT 920 penceShareholder Value Beteiligungen rated new buy at GSC ResearchSophos rated new hold at HSBC; PT 435 pence
MSCI Asia Pacific down 0.6%, Nikkei 225 down 0.6% S&P 500 down 1.6%, Dow down 1.2%, Nasdaq down 1.7%Euro up 0.02% at $1.0959Dollar Index down 0% at 99.13Yen down 0.08% at 107.18Brent down 0.4% at $58/bbl, WTI down 0.4% to $52.4/bblLME 3m Copper up 0.5% at $5703.5/MTGold spot up 0.1% at $1507.3/ozUS 10Yr yield up 1bp at 1.53%
ECONOMIC DATA (All times CET):
8am: (DE) Aug. Trade Balance ex Ships, prior 8.1b8am: (DE) Aug. Current Account (Seasonally Adjusted), prior 15.1b8:30am: (FR) Sept. Bank of France Ind. Sentiment, est. 99, prior 99
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