April 18, 2017 / 10:33 AM / 4 months ago

Sterling hits two-and-a-half-month high, FTSE sinks after UK PM calls early election

A pile of one pound coins is seen in a photo illustration shot June 17, 2008.Toby Melville/Illustration/File Photo

LONDON (Reuters) - Sterling jumped to its strongest levels since early February on Tuesday while UK stocks hit a two-and-a-half-month low, after British Prime Minister Theresa May surprised markets by calling an early parliamentary election for June 8.

May said in a statement she had decided "with reluctance" that an election was needed to secure political unity and stability as Britain negotiates its way out of the European Union.

The pound surged as high as $1.2659 as investors reacted to the news, reflecting relief that rumours she might announce her resignation did not transpire. That left it up 0.7 percent on the day.

On a trade-weighted basis, sterling rose 0.9 percent to its highest in four months. The blue-chip FTSE was set for its worst day since June 27 in the aftermath of the Brexit referendum. The index was down 1.6 percent with all but one stock in the red.

The index's majority foreign-earning stocks tend to gain from a weaker pound.

"Overall markets are seeing this as a bit of security and something that will strengthen our negotiating power as we go through the Brexit process," said Alex Edwards, head of currency dealing at money transfer company OFX.

"It’s a very tactical move from Theresa May. She’s got momentum behind her and it looks like a sure thing that she’ll get in (again) because there’s no alternative. Markets quite like that. I think markets (think) that Labour isn’t an alternative."

Against the euro, sterling jumped half a percent to 84.25 pence.

"For the moment at least it is not being seen particularly as a negative," said Simon Derrick, head of the markets strategy team at Bank of New York Mellon in London.

"I guess people see that this may give Theresa May a better majority. It is a politically astute move and it should provide more stability going over the immediate aftermath of the exit from the EU."

He added, however, that uncertainty generated by the election was likely to prevent bigger gains for sterling in the month ahead.

British government bond prices pared gains, causing the yield on 10-year gilts to rise by around 1 basis point to 1.03 percent by 1100 GMT.

Additional reporting by Helen Reid, David Milliken and Patrick Graham; editing by John Stonestreet

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