Britain’s benchmark stock index dipped into negative territory for the year on Wednesday, as investors worry that a stronger pound saps the foreign-based revenues for many of the FTSE 100’s multinational companies.
The blue-chip gauge slipped as much as 0.5 per cent on Wednesday by the close of trading. The pound retraced some gains in late trade from session highs above the $1.2850 level after surging on Tuesday from a low of $1.2516, a rally that spurred the FTSE 100’s worst daily drop since the Brexit vote — down 2.5 per cent.
The FTSE 100 hit an all-time high last month but has now dropped nearly 4 per cent from that peak. Softer metals prices, notably for iron ore, and a weaker tone for global equities in general, are also pressuring the index, which has a significant weighting in mining and commodity companies.
The FTSE 100 implied volatility index eased slightly on Wednesday after surging more than 10 per cent to 16.29, its highest level since late November.
The announcement of a snap general election for June 8 drove the pound to a six-month high. While currency strength has weighed on blue-chips, the more domestically orientated mid-cap FTSE 250 was up 1 per cent on Wednesday.
“The big hit to the FTSE 100 index [on Tuesday] was all about currency translation,” said Ian Williams at Peel Hunt.
Theresa May’s call for an election in seven weeks’ time has boosted investor hopes the prime minister will have a stronger domestic mandate to secure the UK’s EU exit and push back hard deadlines for a trade deal until the end of her renewed parliamentary term in 2022.
The Conservatives are on course to win over 40 per cent of the vote, according to the latest polling.
“With a larger majority, it seems more likely that whatever deal Mrs May eventually negotiates with the rest of the EU will be rubber-stamped by Parliament. So, the election should reduce the likelihood that the UK will leave the EU without any deal in place — the most damaging of all ‘hard Brexit’ scenarios,” said Chris Scicluna at Daiwa Capital Markets.
Mr Williams said: “Despite the concerns about more uncertainty, the macro impact on the UK economy of the election is unlikely to be too dramatic. Indeed, if the pound holds its gains it will begin to moderate some of the inflationary upside pressure from the cost of imports.”