Weak sentiment and rising leading indicators combined with a supportive central bank is the best combination for asset markets. Sentiment towards the UK has been dismal, but with the ruling Conservative party’s much larger than expected victory at the General Election, sentiment has risen sharply and will continue to rise for the time being in our view. The top-left chart shows how the volume of stories about Brexit on Bloomberg correlates with the FTSE’s daily returns. As can be seen, the correlation has hit lows and begun rising again (ie news stories on Brexit having less of a negative impact on the market) at periods when a no-deal Brexit became less likely (at least temporarily). The most recent nadir in this correlation was reached in October just before Boris Johnson announced his new “oven-ready” deal after talks with the Irish prime minister. Since then, sentiment on this measure has risen to almost its highest in over two years. We think this trend will continue, boosting equity markets.

Improving sentiment lines up with our leading indicators. The top-right chart shows an organic recovery in growth was already under way, and the bottom-left chart shows our leading indicator picked up the FTSE250 vs FTSE100 outperformance, with more to come we think. Equity inflows should continue too (last chart). However, the equity-market boost could be short-lived – 3-4m – as there is more uncertainty to come, with a no-deal Brexit still on the cards at the end of 2020.

(Click on image to enlarge)

Source: Bloomberg, Macrobond, Variant Perception