- Title: Pound hits 31-year low on "hard" Brexit worries while stocks soar
- Date: 4th October 2016
- Summary: LONDON, ENGLAND, UK (FILE) (REUTERS) VARIOUS OF CONSTRUCTION WORKERS ON A BUILDING SITE IN CENTRAL LONDON
- Embargoed: 19th October 2016 13:09
- Keywords: Sterling slides 31-year low "hard" Brexit worries bite stocks surge
- Location: LONDON, ENGLAND, UK
- City: LONDON, ENGLAND, UK
- Country: United Kingdom
- Topics: Currencies/Foreign Exchange Markets,Economic Events
- Reuters ID: LVA00452LA45P
- Aspect Ratio: 16:9
- Story Text: Sterling slid to its lowest in more than three decades on Tuesday (October 4) on fears of a "hard Brexit" from the European Union and its single market that could hurt the economy, although the weaker pound sent UK stocks surging.
The pound has already lost 1.7 percent against the U.S. dollar since Prime Minister Theresa May said on Sunday the formal process to take Britain out of the EU will start by the end of March 2017. On Tuesday, she added the divorce from the EU will not be "plain sailing" and that there would be "bumps in the road".
Many economists and investors fear May's government will back a "hard Brexit" option where Britain quits the single market in favour of imposing controls on immigration.
That could hinder inward and outward trade and constrict the foreign investment needed to fund Britain's huge current account deficit, one of the biggest in the developed world.
Economic activity has held up better than many had expected since Britons voted in a June referendum to leave the EU, but many policy-makers are anxious about the prospects for future investment. The Bank of England launched a big stimulus package in August and may ease policy again in coming months, which could drag the pound still lower.
The pound extended losses on Tuesday, slipping more than half a percent to $1.2737, its weakest since mid-1985. It also hit a three-year low of 87.65 pence per euro, down 0.2 percent on the day.
The nervousness in the spot market led to a rise in the cost of hedging against sharp swings in the currency in the next three to six months.
The cost of hedging sterling exposure against the dollar for six months -- which includes March, when May says Brexit will begin -- was at 10.60 percent, the same as the nine-month option. Typically a nine-month currency option is dearer than a six-month one.
"It's very hard to put a finger on it, the truth is, this is not new news, yes we had Theresa May putting a date on the point at which we are likely to exercise Article 50 and start the formal process of leaving the EU but let's be clear, the country voted on June 23rd and made its views absolutely plan so I am slightly perplexed as to why the pound weakened so much," said Darren Sinden, Independent market analyst.
The pound's tumble boosted British stocks, however, with the market also taking heart from soundings from UK factories last month that indicated the economy was still on track for robust growth in the third quarter.
With the cheaper currency promising to bolster earnings and enhance competitiveness, Britain's FTSE 100 index rose above the 7,000-point level for the first time since mid-2015.
The blue-chip index has risen more than 11 percent since its pre-Brexit level and is within striking distance of its historic high of 7,122.74.
Even more heartening for investors has been the rise in the domestically exposed FTSE 250 index of mid-sized British firms, which hit a record high on Tuesday having gained around 6.5 percent since the referendum.
"So many of the companies which are constituents in the FTSE 100 make most of their money externally to the UK i.e. they're exporters. I think around 70 per cent or maybe more of FTSE 100 revenues come from overseas. The pound falls, the goods and services that those companies become cheaper to foreign buyers and the market believes therefore that they will benefit from that, and share prices rise," explained Sinden.
The mid-caps have benefited from upbeat data and surveys of British households and businesses that have led many forecasters to drop predictions the economy will slip into recession this year. U.S. investment bank JPMorgan, for example, doubled its third-quarter GDP forecast to an annualised 2 percent last week.
Analysts also cited the prospect of further acquisitions as foreign buyers take advantage of a cheaper currency to scoop up UK companies.
"It's very difficult to speculate. There's obviously a lot of nervousness around in the markets and volatility as well. Brexit's not the only issue weighing on the market's mind. It's one of a number of key points the markets are focussed on. It's hard to say - the truth is you can expect more volatility as we go through. The process is going to take two, perhaps five or six years to complete and I think we'll see periods of positivity and periods of negativity within that in equal measure would be my best guess," added Sinden.
- Copyright Holder: FILE REUTERS (CAN SELL)
- Copyright Notice: (c) Copyright Thomson Reuters 2016. Open For Restrictions - http://about.reuters.com/fulllegal.asp
- Usage Terms/Restrictions: None