While uncertainties over Brexit cleared, as the Euro surged against the Dollar, the European STOXX 600 Index rose modestly by 0.92% (3.16% in US$ terms).
Brexit matters continue to take the centre stage. Previously, many were worried that the UK would risk a no-deal Brexit, as the UK Prime Minister Boris Johnson has repeatedly emphasised the need for the UK to leave on 31st Oct 2019 “no matter the circumstances”. Fortunately, the EU did eventually give green light to a further extension of the Brexit deadline till the end of January 2020. With the snap general election called and passed in the parliament, the parliamentary elections should bring forth a conclusion to the whole Brexit debacle. While it is currently too early to predict the outcome of the election, a hard Brexit is less likely, and the ultimate plan should not deviate far from the existing ones.
Given that the European markets have been relatively undervalued due to various geopolitical risks, both the UK and the European markets are possibly set for gains via valuation recovery. Yet, the rally might be limited as the fundamental factors are left unresolved. Eurozone manufacturing PMI remained in the contraction zone for nine consecutive months, while the Euro Area Economic Sentiment Indicator, a leading indicator of Eurozone economy, further dropped to 100.8 in October, continuing the downtrend from late 2017.
As the fundamental growth drivers for the European economy are still missing, we should see a visible but limited upside for the European markets in the short to mid-term. Investors could look out for significant changes to the economic indicators in the coming months before investing for the long term.