Sterling stabilises as FTSE 100 sees 2017 gains wiped out

Jasper Jolly
ICAP Brokers Continue To Trade During Financial Turmoil
Investors saw the FTSE 100's 2017 gains wiped out (Source: Getty)

Sterling stabilised on Wednesday morning, trading near levels not seen since before the October flash crash and undoing all of the gains in the FTSE 100 since the start of 2017.

Prime Minister Theresa May shocked markets yesterday by announcing she would seek a General Election on 8 June.

Sterling soared after jitters ahead of the announcement were replaced by traders welcoming the strong likelihood of an increased majority for May’s Conservative party.

Read more: Sterling rises to four-month high as Theresa May announces General Election

The pound was trading relatively flat after rising to its highest point against the dollar since the start of October during US trading. The October fall came after panic spread through financial markets as automated traders built on earlier declines.

The FTSE's worst days since the start of 2016

Date Price Change %
20 Jan 2016 5,673.58 -3.46%
24 Jun 2016 6,138.69 -3.15%
8 Feb 2016 5,689.36 -2.71%
27 Jun 2016 5,982.20 -2.55%
18 Apr 2017 7,147.50 -2.46%
11 Feb 2016 5,536.97 -2.39%
4 Jan 2016 6,093.43 -2.39%
2 Feb 2016 5,922.01 -2.28%
14 Jun 2016 5,923.53 -2.01%

Against the US dollar the pound rose as high as $1.2860, before paring some of those gains. At the time of writing the pound was trading above $1.2834.

The FTSE 100 fell from last night’s close of 7,147.50 points to trade at 7,130.10 points at the time of writing. This was below the level recorded at the close of the final session of 2016.

That came the day after the index fell by 2.46 per cent, the biggest single-day fall since 27 June, the Monday after the EU referendum result. Meanwhile the all-share index fell by 2.18 per cent.

Read more: What does the General Election mean for sterling? What the experts said

The FTSE has enjoyed a boost from the weaker pound since that knee-jerk move after the Brexit vote, increasing to record highs of 7,447 points last month as sterling weakness and a better-than-expected performance from the British economy persisted.

However, rising sterling causes the dollar earnings of UK-listed companies to be worth relatively less, lessening their value in pounds.

The Bank of England has previously flagged the ambiguous consequences for movements in the currency on the real UK economy.

Read more: Parliament set to confirm General Election on 8 June

On the one hand weaker sterling boosts exporters (including many FTSE 100 companies) by making their products more attractive for foreign buyers. However, if the perception of the future trade relationship with the EU improves sterling will likely appreciate as well, leading to weaker dollar earnings once more.

Despite the dramatic reaction of sterling the reaction on debt markets was relatively muted, with yields on UK 10-year gilts rising after the announcement but remaining below levels seen earlier in the week. Yields move inversely to prices.

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