Sterling held onto gains against both the euro and the dollar on Wednesday amid speculation Britain’s surprise decision to call a snap election could ultimately deliver a more market-friendly outcome in its divorce from the European Union.
In early trading, the pound was at around €0.836 and $1.284, close to its highest level since last December. Tuesday’s jump of just over 1.6 per cent was also the currency’s biggest one-day rise since March last year.
“We expect that the PM’s gamble is likely to buy her more time as well as room for manoeuvre in the Brexit negotiations as she will depend less on fringe groups in her own party,” said Citi’s chief global political strategist, Tina Fordham. “That may reduce the risk of a negotiation failure and thus ‘chaotic Brexit’, but also of the UK remaining in the Single Market in the long-term or even reversing the decision to leave the EU.”
Britain’s top share index came under pressure, however, giving up the gains it had made in 2017.
The blue chip FTSE 100 index was down 0.1 per cent at 7,143.37 points by, bucking a broadly positive trend on European markets, while the UK mid caps gained 0.9 per cent.
The British parliament was expected to formally approve Ms May’s plan later on Wednesday. Sterling’s rise weighed on the FTSE 100’s predominantly dollar-earning constituents, which have enjoyed a rally since the June referendum last year when the UK voted to leave the European Union.
Heavyweight oil firms Royal Dutch Shell and BP fell, down 1.4 per cent and 0.5 per cent respectively. Luxury goods firm Burberry was the biggest faller, dropping more than 5 per cent.
It was set for its biggest one-day loss since October after reporting a slight slowdown in its fourth-quarter comparable sales growth rate. “There is a small slowdown in Q4 Retail LFL (like-for-like) sales over Q3 ... which may give the market pause for thought,” analysts at Liberum said in a note. “News of a snap UK election has seen a strong rally in GBP. Should this continue towards polling day Burberry’s own, FX-driven rally could disintegrate. We urge investors to take profits and sell from a position of relative strength.”
More domestically exposed firms, however, such as grocers Sainsbury, Marks & Spencer and Primark-owner Associated British Foods, were among the top gainers, all up between 2.2 per cent to 3.4 per cent. “The interesting second-order effect from the sterling move is the inflation story because that’s been a big concern, particularly on the consumer-facing stocks ... (because) of what it does to their input costs,” Peel Hunt strategist Ian Williams said. “Historically the sectors that do relatively well when
sterling is rising tend to be ... the more domestic-focused ones, so real estate, retail.” Likewise Britain’s FTSE 250, whose firms have a greater exposure to the domestic economy, nearly recovered the previous session’s losses and held close to record highs. Defence stock Cobham slumped 9 percent after 683 million new shares were added to trading in its rights issue.
Safe-haven bonds also held onto most of their recent gains ahead of presidential elections in France and on escalating tensions between the United States and North Korea.
Equities, meanwhile, were largely sidelined with futures pointing to opening losses for German and UK bourses, while E-mini futures for the S&P 500 were all but flat. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.6 per cent to the lowest since mid-March.
Japan’s Nikkei managed to steady for the moment, but Shanghai extended its recent retreat with a drop of 1 per cent. The Chinese market has fallen for four straight sessions on concerns over tighter regulations.
A run of disappointing US economic data and doubts the Trump administration will progress with tax cuts have quelled expectations of faster inflation and boosted fixed-income debt. That, in turn, has taken the steam out of Wall Street.
The Dow fell 0.55 percent on Tuesday, while the S&P 500 lost 0.29 per cent and the Nasdaq 0.12 per cent. Goldman Sachs lost 4.7 per cent in the largest daily drop since June after its earnings missed expectations as trading revenue dropped.
In commodity markets, profit taking nudged gold down 0.4 per cent to $1,287.10 an ounce, and away from Monday’s peak of $1,295.42. Oil prices slipped as US crude stockpiles fell by less than expected and a U government report said shale oil output in May was likely to post the biggest monthly increase in more than two years.
Brent crude was last down 16 cents at $54.73 a barrel, while U.S. crude fell 12 cents to $52.29.
Reuters
