Theresa May’s surprise general election announcement sparked a surge in the pound and UK blue-chip shares suffered their biggest one-day decline since the country voted to leave the EU.
The pound climbed as much as 1.6 per cent to a five-month high of $1.2772 on Tuesday, breaking through a long-term downward trend for the first time since the vote for Brexit as investors bet the prime minister would use the vote to neutralise Tory Eurosceptics and deliver a soft Brexit.
“Not only does this neutralise Labour and the SNP, but it means she can negotiate a Brexit deal along the lines of what she wishes for, rather than having to appease the hardliners in her own party,” said David Owen, chief European financial economist at Jefferies. “She is now in a position to neutralise them as a threat.”
The strength of the pound unnerved UK stock markets, which have been energised by sterling’s slide since the Brexit vote as global companies with earnings in dollars benefit.
The FTSE 100, London’s main equities benchmark which includes most of Britain’s large multinationals, dropped 2.5 per cent to close at 7,147.5, its worst daily decline since June 27. That leaves the blue-chip benchmark barely positive for the year. The FTSE 250 index of more domestically orientated companies fell 1.2 per cent.
1. Theresa May’s “citizens of nowhere” speech leads to start of sterling sell-off
2. Philip Hammond and David Davis meet bank chiefs at the Shard in a “reassurance exercise”
3. May’s Sky TV interview leaves markets unimpressed; pound falls again
4. Sterling retreats after Downing Street briefings on May’s upcoming speech on Brexit
5. May’s Lancaster House Brexit speech contributes to pound’s 3 per cent bounce
6. Bank of England meeting prompts sterling fall
7. Article 50 is triggered, starting a two-year exit negotiation process
8. May seeks early election to take UK through Brexit
Laith Khalaf, senior analyst at Hargreaves Lansdown, said investors would be best served to “keep politics out of their portfolios” even with the FTSE registering its biggest fall since the EU referendum.
“Investors will be once bitten twice shy when it comes to positioning their investments based on what happens at the ballot box, following the Brexit vote last year. Not only was the result a surprise, so were the effects on financial markets.”
Against the euro, the pound strengthened 1 per cent, with £0.8385 needed to buy a unit of Europe’s shared currency. It is the pound’s highest level since late February.
The rally led the pound to break through the closely watched 200-day moving average, which points investors towards a potential upwards shift in the currency. Moving averages are widely followed measures of momentum that investors use to track price trends over various durations.
When market prices either rise or fall through such technical levels, it can be taken as an important signal that accelerates asset movement.
Meanwhile, yields on 10-year UK government debt were volatile, dipping to 1 per cent before jumping back up again to 1.06 per cent, and subsequently reversing to 1.02. Yields move inversely to prices.
Mrs May has been facing the challenge of extracting Britain from the EU while under pressure from her party’s Eurosceptics to achieve as distant a future relationship as possible — or a so-called hard Brexit.
With a slim parliamentary majority of just 17, Tory rightwingers have had significant power to influence the outcome of negotiations that were officially triggered at the end of March. The Conservatives have been riding high in the polls for months, and the prime minister is seeking to translate that into a sufficiently substantial majority to drown out the 20 to 30 most committed hardliners on the backbenches.
Luke Bartholomew, an investment manager at Aberdeen Asset Management, said Mrs May “smelled an opportunity to consolidate her mandate” ahead of the Brexit negotiations.
“A big factor for them is whether the election will make a softer stance on the Brexit negotiations more likely,” he said. “The election should hand Theresa May a much bigger mandate to stand up to the harder line, anti-EU backbenchers which currently hold a disproportionate sway over her party’s stance on Brexit. That would be welcomed by financial markets.”
Stephen Gallo, European head of forex strategy at Bank of Montreal, said: “A snap UK general election is positive for the pound. Yes, the election adds a layer of uncertainty, but from what I can see the Conservative party stands to pick up a decent amount of seats.”
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News: May seeks snap election to take UK through Brexit
Comment: May seizes the moment to bank poll lead
Transcript: Theresa May’s speech
Despite the initial sanguine reaction, investors have long regarded the prospect of an early election as unsettling. The prospect of uncertainty in the run-up to the proposed June 8 poll and, potentially, beyond left some analysts feeling unnerved.
Richard Hunter, head of research at stockbroker Wilson King, pointed to June 8 election as “a fresh addition to the risk calendar”, and said it was likely to put the break on further gains to the UK equity market, at least for the time being.
“The worst-case scenario for UK stocks, at least in the immediate term, is that elements from across the current opposition parties unite to use the election to call for a new referendum. That would add to the existing uncertainty that the general election creates, since it would be likely to lift sterling, hurting the benefits to the London stock markets of a weaker pound.”