Britain’s benchmark stock index gave up the last of its 2017 gains and dipped into negative territory for the year on Wednesday, as investors worry that a stronger pound will sap the foreign-based revenues for many of the FTSE 100’s multinational companies.
The blue-chip gauge slipped as much as 0.3 per cent on Wednesday, and remained near its low for the session at midday. The pound was a touch lower at $1.2815 after surging on Tuesday from a low of $1.2516, a rally that spurred the FTSE 100's worst daily drop since the Brexit vote, down 2.5 per cent.
The FTSE 100 hit an all-time high last month but has now dropped nearly 4 per cent from that peak. Softer metals prices, notably for iron ore, and a weaker tone for global equities in general, are also pressuring the index, which has a significant weighting in mining and commodity companies.
The FTSE 100 implied volatility index eased slightly on Wednesday after surging more than 10 per cent to 16.29, its highest level since late November.
The announcement of a snap general election for June 8th drove the pound to a six-month high. While currency strength has weighed on blue-chips, the more domestically orientated mid-cap FTSE 250 was up 1 per cent on Wednesday.
“The big hit to the FTSE 100 index [on Tuesday] was all about currency translation,” said Ian Williams at Peel Hunt.
Theresa May’s call for an election in seven weeks’ time has boosted investor hopes the prime minister will have a stronger domestic mandate to secure the UK’s EU exit and push back hard deadlines for a trade deal until the end of her renewed parliamentary term in 2022.
The Conservatives are on course to win over 40 per cent of the vote, according to the latest polling.
“With a larger majority, it seems more likely that whatever deal Mrs May eventually negotiates with the rest of the EU will be rubber-stamped by parliament. So, the election should reduce the likelihood that the UK will leave the EU without any deal in place – the most damaging of all ‘hard Brexit’ scenarios,” said Chris Scicluna at Daiwa Capital Markets.
Mr Williams said: “Despite the concerns about more uncertainty, the macro impact on the UK economy of the election is unlikely to be too dramatic. Indeed, if the pound holds its gains, it will begin to moderate some of the inflationary upside pressure from the cost of imports.”
Sterling dropped from a six-month high after Mrs May won approval from lawmakers for an election on June 8th.
Short-term traders faded Tuesday’s move, when sterling climbed above $1.29 to hit the highest since October 3rd, and losses extended to a session low after the vote in parliament.
“Caution is warranted from here as recent currency upside was exaggerated by a market that was heavily short,” said Manuel Oliveri, strategist at Credit Agricole. While the parliamentary decision was not surprising, it would take higher rate or better long-term growth expectations to sustainably push the currency up, he added.
Despite the weakness in the FTSE 100, companies with a more domestic focus, however, such as grocer Sainsbury, budget airline easyJet and Royal Bank of Scotland, were big gainers, all up by about 5 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," said Peel Hunt strategist Ian Williams. "Historically, the sectors that do relatively well when sterling is rising tend to be ... the more domestic-focused ones; so real estate, retail." Britain's FTSE 250, constituents of which have greater exposure to the UK economy, recovered some of the previous session's losses and held close to record highs. – Copyright The Financial Times Limited 2017 / Reuters / Bloomberg
