Investors are increasingly concerned that the UK is about to become a “dumpster” for US stock markets as a Brexit-led uncertainty over Brexit rules pushes stocks to a new all-time low.
The UK has fallen into a state of “extreme uncertainty” after Donald Trump’s inauguration, triggering a fresh bout of selling in the markets, according to Morgan Stanley.
Investors have taken advantage of the market’s near-total sell-off by buying up shares in the US, but are now nervous about a possible drop in sterling if Brexit is not implemented.
Morgan Stanley is warning that a potential fall in sterling could prompt investors to buy shares in US companies that trade with the UK in the first place.
Morgan is also worried that the government’s new plans for a “trade deal” with the EU could be detrimental to UK businesses.
It is “a major risk for our UK companies”, it added.
Brexit uncertainty could cause UK stock market volatility, Morgan Stanley warned in a research note.
The firm noted that the British economy has been growing for two years, but the government is “shopping around for new trade deals” with other countries and the UK’s financial services sector has suffered from the uncertainty.
“This uncertainty may push up the UK stock markets further and cause the UK to become the dumping ground of the US and Europe,” Morgan Stanley said.
“If the government continues with its current approach, it will have a substantial impact on the financial markets and the economic recovery.”
Investors have been buying US stocks as US businesses continue to struggle following a string of big losses.
The Dow Jones Industrial Average lost 7,200 points to 24,091, the S&P 500 dropped 2,400 points to 2,071, and the Nasdaq Composite lost 730 points to 8,723.
US stock prices fell by 2.3% on Thursday to a record low of $26,737.20.
The market is also facing a slowdown in China as a slowdown from the country’s manufacturing sector could trigger a slowdown, and concerns are growing over the impact of the Brexit process.
US President Donald Trump has been trying to boost US exports in recent months by renegotiating trade deals with countries including the UK and the EU, but those negotiations have so far failed to produce results.
Morgan said that the “resilience of US businesses and investors” has been severely tested since the Brexit vote.
“The UK market was a great success story for US businesses,” Morgan said.
The US stock market has been in a bear market since the end of March, hitting record highs in February and March.
Morgan also noted that it was “hard to see a silver lining” from Brexit as it is a major economic risk for the UK.
“It is likely to see significant volatility and further downward pressure on the pound,” Morgan warned.
The bank added that there was no “silver bullet” for the market.
“While the government has tried to sell the idea of a trade deal, it has not succeeded and there is a large amount of uncertainty about what it may offer,” it said.
Morgan, however, is optimistic that a trade agreement could be implemented.
“One option is to allow UK exporters to trade freely with the US.
It would open up trade opportunities for UK companies in the USA and create a much stronger market for UK exporter’s exports,” it added