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Pound falls steeply as Brexit resignations rock UK government Pound tumbles as UK markets suffer Brexit deal volatility
(about 5 hours later)
The pound has fallen steeply against major international currencies after Theresa May’s government was rocked by multiple resignations over her Brexit deal. Britain’s financial regulator has been in contact with City firms as a raft of resignations over Theresa May’s Brexit deal hit markets, sending the pound lower and putting UK housebuilders on track for their worst one-day drop since 2016.
Sterling fell from above $1.30 to $1.28 against the US dollar by midday on Thursday, a drop of about 1.5%. Against the euro, sterling fell by 1.5% to €1.1317. The Financial Conduct Authority (FCA) is understood to have been in touch with stock exchanges, bigger banks, and asset management companies regarding market volatility.
Markets were reacting to chaos on the government benches as senior Brexit-backing ministers objected to a draft withdrawal agreement with the EU that the prime minister presented to the cabinet on Wednesday afternoon after months of negotiations between British and EU officials. An FCA spokesman said: “As you would expect in this type of situation we have regular contact with firms and will continue to engage with them.”
Dominic Raab and Esther McVey, the Brexit secretary and the work and pensions secretary respectively, resigned on Thursday morning, saying they could not support the draft deal. They were joined by the junior ministers Suella Braverman and Shailesh Vara. Investors were offloading shares in FTSE-quoted companies with large domestic businesses and UK currency holdings in an effort to reduce their exposure to the British economy.
The share prices of the UK’s mid-cap companies on the FTSE 250 slumped by about 1% as investors reduced their exposure to the British economy. However, the FTSE 100, whose constituents earn the majority of their profits in foreign currencies, rose by about 0.1% in morning trading. Royal Bank of Scotland was the biggest faller on the FTSE 100, with shares closing down 9.6% at 224p. The market value of the bank, still 62% owned by the government, fell by £2.8bn in Thursday’s sell-off.
Andy Scott, an associate director at JCRA, a risk management consultancy, likened the chaos to a Shakespearean tragedy. “These developments cast a significant doubt over whether the agreement reached will ever make it to a political declaration, significantly increasing the risk that the UK leaves the EU without a deal,” he said. Housebuilders Persimmon, Taylor Wimpey and Barratt Developments all closed down more than 7%, with Berkeley Group falling more than 6%. The four FTSE 100 housebuilders lost £1.6bn collectively from their market capitalisations.
Currency analysts at BNP Paribas calculate that sterling is undervalued by only 6% compared with economic fundamentals, suggesting a no-deal Brexit could prompt a significant further fall in the value of the pound. The pound also took a tumble against major international currencies, dropping from above $1.30 to less than $1.28 against the US dollar by Thursday afternoon, a drop of 1.9%. Against the euro, sterling fell by 2% to just under €1.13.
The market is “pessimistic about the chances of the Brexit agreement passing a vote in the House of Commons”, although it could rally significantly “if, somehow, Mrs May survives and wins the vote”, said Kit Juckes, the global fixed-income strategist at Société Générale. Sterling was on course for its biggest one-day drop against the dollar since October 2016 and versus the euro since shortly after the Brexit vote in June that year.
Other financial indicators suggested the drama in Westminster was making investors more nervous about the UK’s economic prospects.
Nerves among British government bond investors forced the UK debt agency to accept low bids for a 20-year bond at auction to an extent not seen since March 2009, while the cost of insuring exposure to Britain’s sovereign debt rose to its highest level in almost two years.
Laith Khalaf, a senior analyst at Hargreaves Lansdown, said: “The market has taken a big red pen to stocks which are heavily exposed to the UK economy like the banks, retailers and housebuilders.
“These sectors were already under pressure, but the potential for an orderly Brexit to unravel in the next few days is causing further distress to be manifested in share prices.”
He said the weaker pound was helping buoy the FTSE 100, as the relative strength of foreign currencies tends to boost the share price of international firms whose revenue largely comes from overseas.
The FTSE 100 closed flat on the day, with gains among mining and oil companies offsetting losses in more UK-focused businesses. The FTSE 250 index of smaller, more UK-oriented companies closed down 1.3%.
“However, if sustained, a weaker pound spells bad news for a retail sector which is already struggling, as it raises the price of imported goods and at the same time squeezes consumer incomes,” Khalaf said.
Markets were reacting to chaos on the government benches, as senior Brexit-backing ministers objected to a draft withdrawal agreement with the EU that the prime minister presented to the cabinet on Wednesday after months of negotiations between British and EU officials.
Khalaf said a lack of certainty around Brexit would mean further pain for markets. “We can expect continued volatility in financial markets while political uncertainty swirls around Westminster.”
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