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FTSE and pound extend rally as May odds on to survive vote

FTSE and pound extend rally as May odds on to survive vote

Update: Both the pound and the UK stock market have rallied in an unexpected synchronised surge as Prime Minister Theresa May continues to fight for her political life.

Sterling recovered from 20-month low overnight to advance 1.1% to $1.2621 against the dollar, its biggest one-day gain in six weeks, as the Conservative party confirmed May would face a vote of no confidence on her leadership this evening.

This prompted the prime minister, who had returned from visiting European leaders in a bid to gain concessions on the Irish backstop to enable her to get her EU withdrawal deal through Parliament, to mount a last-ditch defence in Downing Street ahead of the secret ballot of MPs at 6 p.m.

‘A change of leadership in the Conservative party now would put our country’s future at risk and create uncertainty when we can least afford it,’ May warned.

‘Weeks spent tearing ourselves apart will only create more division just as we should be standing together to serve our country,’ she added.

The prospect of an overwhelming defeat saw the embattled premier cancel a vote on Monday, prompting more hard-line Tory Brexit rebels to write to the party's 1922 committee to express their loss of confidence in her. Tonight's vote was triggered when 48 letters were received. The result will be announced at 9 p.m.

The pound had earlier jumped half a cent to $1.2550 against the dollar after lord chancellor David Gauke said Britain would need to delay its exit from the EU if May lost the vote.

‘In terms of negotiating any type of arrangement with the European Union, I think it is inevitable that if she were to lose the vote tonight there would need to be a delay in Article 50,’ Gauke told BBC radio, referring to the mechanism under which the UK is set to leave the EU on 29 March.

Bookies Betway expected May to pull through with 1/5 odds and retain the support of a majority of Conservative MPs desperate to avoid a leadership battle that could encourage Labour and opposition parties to push for a general election that could kick the Tories out of office.

If she does lose the vote and resigns, former home secretary Boris Johnson was Betway's 7/2 favourite to replace her.  

Commentators mulled the options. Andy Scott of JCRA, a risk management consultancy, said: ‘If, as looks likely, Theresa May wins tonight’s vote, that would leave us back where we were on Monday, but without the risk of a change of leader unless she resigns. If, however, she loses, there’s the risk of a Brexiteer becoming PM and a hard Brexit in March. This scenario would cause further weakness for sterling due to the higher risks to the economy.

‘Alternatively, if a former remainer took the keys to Number 10, we would expect there to be a delay to Article 50 to allow time for further negotiations. This scenario would be relatively neutral for sterling which is currently dealing at historically weak levels against its major counterparts,’ Scott said.

Eoin Murray, head of investment at Hermes Investment Management, said: ‘If anything, this move takes us a step closer to our base case, that we are on track for a “no” outcome of one flavour – no Brexit deal – or the other – no Brexit. But there is plenty more in this to run.’

Alastair George, investment strategist at Edison Research, believed the ‘Brexit process has reached a point of reset which is very likely to materially delay the exit of the UK from the EU, if it happens at all.’

He said the European Court of Justice ruling on Monday that the UK could revoke Article 50 unilaterally and return to the EU had slashed the odds of a ‘calamitous no-deal scenario’ and created a buying opportunity in the UK stock market.

‘UK equity valuations are now priced at levels which discount much of the uncertainty expected in coming quarters. The median forecast cash flow yield for the FTSE 350 has risen from the 2014-2018 average of 4.7% to over 6% in recent months.

‘With both AIM and the FTSE 250 having declined by close to 20% from the highs of earlier 2018, we believe the time to be mechanically underweight UK equities because of Brexit has passed, even if volatility is likely to persist in the short-run,’ said George.

Investors agreed pushing the FTSE 100 index 1.1% or 75 points higher at 6,882, with the blue-chip benchmark extending its gains after Wall Street opened higher on growing hopes of a US-China trade deal.

Rolls Royce (RR) led the index higher, rising 4.7% or 36p to 817p after the aircraft engine maker told investors it expected profits and free cash flow to be at the top end of its previous guidance.

J Sainsbury (SBRY) slid 6.5% or 19p to 27p after the supermarket and its rival Asda said they would challenge the refusal of the Competition and Markets Authority to give them more time to respond to its probe of their proposed £7.3 billion merger.

The retail sector wobbled after Superdry (SDRY) plunged by 36% or 206p to 347p after the fashion chain issued its second profits warning in three months, blaming the unseasonally warm weather for poor sales of jackets and jumpers.

Sentiment was further soured by Dixons Carphone (DC) which slumped 6% or 9p to 142p after the struggling electricals and mobile phone retailer cut its dividend after falling to a £440 million first half loss.

‘Like many on the high street, the group has been hit by shoppers cutting back and in Dixons Carphone’s case, not been changing their phones as often,’ said Graham Spooner, investment research analyst at The Share Centre.

‘As the CEO mentions, headwinds and uncertainty remain for the UK consumer and the plan to transform the business will take time.’

Nevertheless, the rally strengthened outside the FTSE 10o with the 'mid-cap' FTSE 250 - which contains more domestically focused companies - jumping 1.9% or 336 points to 17,990.

The FTSE Small Cap index was more muted, however, adding 18 points or 0.3% to 5,235.

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