Financial Times

Pound lower as UK starts down Brexit road

by Jamie Chisholm and Global Markets Commentator, Financial Times

March 29, 2017 | 9:42 am
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What you need to know

● Stock markets back on the front foot as the “Trump trade” wobble fades

● Dollar recovers some ground and Treasury yields steady

● Sterling under pressure after UK triggers Brexit, but FTSE 100 gains

● Oil prices higher ahead of US inventory data later in the day

● Gold hovers around $1,250 an ounce

 

The pound is under pressure after UK prime minister Theresa May signed the letter that triggers Britain’s divorce from the EU.

The official Article 50 exit process will begin on Wednesday in Brussels with the presentation of Mrs May’s letter to the European Council.

Sterling, which had taken advantage of a recently faltering US dollar to hit on Monday a seven-week high of $1.2615, is slipping 0.4 per cent in the session to $1.2398.

Its weakness is mild though broad, shedding 0.2 per cent versus the euro to £0.8697 and easing 0.4 per cent against the Japanese yen to ¥137.75.

Stripping out October’s “flash crash”, which saw the pound plunge and rebound swiftly in thin Asia trading, the sterling/dollar exchange rate hit a 31-year low of $1.1979 in mid-January amid concerns that a difficult Brexit process and harsh outcome could hurt the UK economy.

Traders will be keeping an eye on whether that level may be breached, potentially signalling further declines, though some analysts are sceptical that the pound should slide significantly from here.

“The pound was the weakest performer in the G10 on Tuesday and has dropped below $1.24 as Article 50 fears and the prospect of a second Scottish Referendum start to bite and the dollar roars back to life,” said Kathleen Brooks at City Index.

“This could be a case of sell the rumour, buy the fact, and we stick to our view that sterling can brush off Article 50-inspired weakness and that sterling is essentially range bound as we formally kick off the process to leave the EU,” she added.

Other UK assets are sanguine, with UK 10-year government bond yields, which move opposite to the price, tracking international peers and rising 1 basis point to 1.20 per cent.

Indeed, London’s FTSE 100 blue-chip equity index has been supported in recent months by sterling’s fall, which is seen bolstering the bottom line of the barometer’s international-focused foreign currency earners.

On Wednesday, the Footsie is up 0.3 per cent to 7,363, not far off its record closing high of 7,430 touched last week.

Equities

London and other stock markets are getting a lift from Wall Street’s positive lead on Tuesday, when investors put behind them disappointment over the Trump administration’s failure to pass a healthcare bill, and returned to the bullish narrative of improving economic conditions and expected US tax reform.

Futures indicate the S&P 500 will start the session later on Wall Street at 2,359, adding half a point to the 17 gained in the previous session.

The pan-European Stoxx 600 index is climbing 0.1 per cent as energy stocks welcome further gains in oil prices.

Australia’s S&P/ASX 200 index rose 0.9 per cent, with gains underpinned by the information technology segment. Fairfax Media took its gain for the week to 7.4 per cent following a report that private equity group TPG had acquired a stake of up to 4.9 per cent in the media group and was weighing a takeover bid.

Hong Kong’s Hang Seng index was flat, with Tencent firmer after the Chinese internet group disclosed it had taken a 5 per cent stake in US electric carmaker Tesla.

Tokyo was an underperformer, with the Topix index dipping 0.2 per cent as a rally for energy stocks failed to offset broader declines, including struggles for the real estate and financial sectors.

Commodities

Crude oil prices are building on gains made late on Tuesday after executives from some of the world’s largest independent oil traders affirmed their belief that Opec would maintain production cuts as long as Russia increased its compliance.

Brent crude, the international benchmark, is up 0.6 per cent to $51.66 a barrel, while West Texas Intermediate, the main US contract, is rising 0.8 per cent to $48.76 ahead of US inventory data later on Wednesday.

Gold is down 0.1 per cent at $1,250 per ounce, shedding some of the gains made earlier in the week during tumult in equities markets.

Forex

The US dollar is adding to Tuesday’s gains as it continues to recover from the “Trump trade” wobble that saw it hit a four-month trough at the start of the week.

The dollar index, which tracks the buck against a basket of its peers, and which on Monday fell below 99.0 for the first time since November 11, is up 0.2 per cent to 99.93.

The euro is off 0.3 per cent to $1.0784 and the Japanese yen is flat at ¥111.12 per greenback.

The South African rand is again under pressure, falling 0.8 per cent to 13.0890 per dollar as investors worry that respected finance minister Pravin Gordhan might be sacked.

Fixed income

The more chipper tone across equities is dimming demand for sovereign bonds.

The US 10-year Treasury yield is up 1bp to 2.42 per cent and the equivalent maturity German Bund is adding 2bp to 0.39 per cent.

The more monetary policy sensitive US 2-year yield is a fraction of a basis point softer at 1.29 per cent after a flurry of Federal Reserve officials over the past 24 hours made comments that provided little to shift interest rate expectations.

Additional reporting by Hudson Lockett in Hong Kong

 

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by Jamie Chisholm and Global Markets Commentator, Financial Times

March 29, 2017 | 9:42 am
12893  |   93   |   0  |   Start Conversation

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