The pound jumped yesterday after Britain and the European Union struck a crucial draft deal on post-Brexit ties.
Sterling’s advance however weighed on London’s benchmark FTSE 100 index which numbers many multinationals whose reported earnings fall on conversion when the pound is strong.
Across Europe, London’s FTSE 100 fell 1.3% to close at 6,960.32 points; Frankfurt’s DAX 30 was down 0.9% at 11,138.49, while Paris’ CAC 40 fell 0.8% at 4,938.14.
Further reasons for the FTSE’s fall, as well as that of eurozone stock markets, were sharp oil price swings, trade war fears and Italian budget woes, dealers said.
US markets were closed for Thanksgiving, depriving European equities of afternoon guidance and sapping trading volumes. That took the focus of action firmly into the foreign exchanges, especially sterling trades.
The pound, which had already been rising slightly ahead of the Brexit deal announcement, accelerated on the news to rise by more than 1% against the dollar on the day.
But the pound later pulled back somewhat after analysts concluded that the draft agreement, although welcome, contained little to justify a sustained upward move for the currency, said Joshua Roberts at the JCRA risk management consultancy.
“Despite the positive language, it is difficult to find much in the text that we didn’t know already,” he said.
But in the meantime currency traders were having a busy day — and a profitable one thanks to rapid moves in the pound’s value.
“For traders who love higher volatility, this is like Christmas coming early,” said Naeem Aslam, chief market analyst at Think Markets. “The fact is that on Thanksgiving day, traders have to stick to their terminals because Brexit related news is bringing mammoth moves for the currency.”
By the end of the European session, the pound stood more than half 1% higher against both the dollar and the euro.
Despite the bounce, “the currency is still much weaker than it was eight days ago” before the resignation of Britain’s Brexit minister Dominic Raab, noted OFX currency analyst Hamish Muress.
Raab last week quit in opposition to a separate draft deal struck between London and Brussels on the UK’s upcoming withdrawal from the EU on March 29.
British Prime Minister Theresa May yesterday told parliament that Brexit negotiations were at a “critical moment” ahead of an EU summit.
Elsewhere yesterday, Asian equities chalked up modest gains in light trading ahead of the US Thanksgiving holiday, following a rebound in energy and tech stocks on Wall Street on Wednesday.
But analysts cautioned that the tepid recovery in New York should not be interpreted as an end to recent carnage seen across global stock markets.
“Markets have been remarkably muted, even by holiday standards,” said Stephen Innes, head of Asia-Pacific trade at trading group Oanda.
He added that the post-Thanksgiving Black Friday shopping spree would be “the ultimate litmus test of US consumer confidence heading into the holiday season”.
Investor sentiment remains fragile following the volatility that has swept markets since October, while the OECD this week warned that the world economy has peaked and faces a slowdown as it confronts trade war issues and higher US interest rates.
But analysts saw a silver lining, saying weaker growth could well translate into less strident interest rate hikes, especially by the US Federal Reserve, than previously forecast — a positive prospect for stock markets.
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