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Pound & FTSE stall, gilts fall on May’s ‘lame duck’ survival

Pound & FTSE stall, gilts fall on May’s ‘lame duck’ survival

(Update) Theresa May’s ‘lame duck’ victory took the zest out of UK currency, government bond and stock markets today as investors weighed the political complexities surrounding the prime minister as she seeks a way out of the Brexit crisis.

The pound, having dipped after May survived last night's no-confidence vote in her leadership of the Conservative party with a 200-117 majority of her MPs, initially regained momentum but then settled back at $1.2635 against the dollar after the premier returned to Brussels to plead for concessions from European Union leaders.

Sterling strengthened slightly against the euro, which dipped to 89.88p after the European Central Bank noted weaker economic data as it confirmed it would halt its huge bond-buying stimulus policies next month but was cautious about raising interest rates next year.

'I recognise the strength of concern in the House of Commons and that is what I will be putting to colleagues today,' May said in reference to her unpopular EU withdrawal deal.

May's decision on Monday to postpone a Commons' vote on the deal, which hardline Brexiteers fear would lock the UK into a customs union with the EU as part of the 'Irish backstop' agreement, was the catalyst for the no-confidence ballot.

'I don't expect an immediate breakthrough, but what I do hope is that we can start work as quickly as possible on the assurances that are necessary,' May added.

Government bonds, or gilts, also see-sawed. Earlier they rose in price as investors sought out the safe havens against the UK's political difficulties and the obstacles facing May as she tries to get her deal through Parliament.

However, as the pound gave way, their prices slipped with their yields – which move in the opposite direction – advancing, with benchmark 10-year gilt yields edging 0.19% to 1.296%.

High yielding FTSE

The stock market weakened after yesterday’s advance. The FTSE 100, which closed 1.1% higher on Wednesday, shed two points to 6,877. The blue-chip index has fallen 7.9% this year, helped by the autumn sell-off.

Spotting one silver lining, Russ Mould, investment director at AJ Bell, said 'Red October' had boosted the FTSE's forecast yield to 4.9%, which he said was 'extremely tempting' against Bank of England base rate of 0.75%.

The more domestically exposed FTSE 250 index stumbled 0.8% or 150 points to 17,838, and the FTSE Small Cap dipped four points to 5,233.

David Lamb of forex specialists Fexco Corporate Payments said the large rebellion had weakened May. ‘The markets have drawn two stark conclusions; the prime minister is a lame duck and the Brexit process is back where it was on Monday morning.

‘Short of some miraculous and unexpected concessions from Brussels, the Brexit process has been catapulted back into limbo, with the clock running down fast,’ he said.

No Brexit or hard Brexit?

Bond investors differed in their interpretation of the outcome although agreed it was a fluid and volatile situation.

John Taylor, fixed income portfolio manager at AllianceBernstein, commented: ‘Theresa May winning the vote of no confidence by this margin has taken a leadership challenge off the table. As such, we can return focus to the Brexit negotiations which remain extremely complex. On the plus side, there appears to be a growing willingness on both sides of the table to avoid the UK crashing out of the EU with no deal.

‘Interestingly, we see the probability of no Brexit at all appears to be gaining ground and could be 30%, but this would necessitate a delay to the 29 March Brexit date and a second referendum. On the other side a no confidence vote in the government by the opposition remains on the cards, which would put substantial pressure on the market.’

He added: ‘Going into 2019 it has become abundantly clear – bond investors need to be remain vigilant and flexible for many months ahead.’

However, David Zahn of Franklin Templeton Fixed Income Group said May – who had to agree to step down before the next general election to win the confidence vote – was in a ‘precarious’ position. He was more negative, believing the chances of a ‘hard’ or no-deal Brexit had increased.

‘Financial markets are likely to react to that development. We’d expect gilts likely to rally, yields to decline and the pound to continue to weaken,’ Zahn said.

Tui Group (TUIT) was a prominent FTSE 100 riser, up 4.7% or 51p gain to £11.90 after the travel group reported a 10.9% rise in annual profits and forecast similar growth next year.

Ocado (OCDO) rose 1.4% or 11p to 804p with after the online grocer unveiled a 12% growth in retail revenues in its latest quarter.

3i Group (III), the private equity giant whose share price had recovered from Brexit fears, fell 2.8% or 22p to 783p despite receiving £77 million of cash from two investee companies that add about 1% to net asset value. The shares stand on a premium of about 25% over NAV, in line with their 12-month average, having briefly fallen to a 3% premium last month.

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