Sterling hit new seven-week lows in morning trading against the US dollar today as investors adjusted to the new reality of a hung Parliament and dumped British-focused assets.
The currency, which has been the chief bellwether for political sentiment around Brexit since last year’s EU referendum, fell as low as $1.265 before rallying back to $1.273 at the time of publication.
The FTSE 250, which is exposed to the UK economy, hit its lowest point since mid-May in early trading, before recovering to fall by only 0.22 per cent at the time of writing.
Garry White, chief investment commentator at Charles Stanley, said: “A discount on equities in companies exposed to the UK economy is likely.”
However, the weak pound boosted the FTSE 100, which rose by 0.65 per cent, peaking briefly above 7,500 points. FTSE 100 companies, mainly made up of massive multinationals, benefit from weaker sterling as earnings in other currencies become relatively more valuable.
The hung Parliament promises significant uncertainty ahead, as the Conservatives try to secure the continued support of the Democratic Unionist party (DUP) to enable it to govern.
Simon Brazier, portfolio manager at the Investec UK Alpha Fund, said: “Minority governments are inherently unstable and the electoral maths of this election result means a second election in the next 12 months is a significant possibility.”
However, the uncertainty and volatility on currency markets did not translate directly to the big market movements of the Brexit vote last year.
Foreign exchange volumes this morning were around three times higher than an average day, but only a third of those seen on 24 June last year, according to Mark Horgan, chief executive of payments company Moneycorp.
“In recent times it’s barely a blip,” said Horgan. However, smaller companies, which have taken a “more rigorous approach to currency exposures” in recent months, are nevertheless following the pound’s movements carefully because of their tight margins, he added.
Bond markets were mostly unmoved. The yield, which moves inversely to price, on the UK’s benchmark 10-year government bond, rose by 2.1 basis points since yesterday afternoon. The yield reached around 1.03 per cent at the time of writing, a level seen earlier this week, according to Tradeweb.
Gilt yields have fallen from above 1.2 per cent since the first week of May, as investors bought safer assets in the face of May’s poll falls. Yet the rise in bond yields today has not pointed to a panicked reaction.
Adrian Hull, senior fixed income investment specialist at Kames Capital, said: “With the gilt market a touch higher there is not panic here. Further sterling weakening could see weaker domestic growth and higher than forecast inflation.”
He added: “This is no 1992 where a surprise election result saw gilts move higher by five points!”
Meanwhile, a leading ratings agency said the lack of a majority may have implications for the UK’s credit rating if it affects the Brexit process or the government’s fiscal stance. A downgrade of the UK’s credit rating could theoretically raise the government’s borrowing costs.
Kathrin Muehlbronner, lead UK sovereign analyst at Moody’s, said: “Moody’s is monitoring the UK’s process of forming a new government and will assess the credit implications in due course.”