Sterling went on a roller-coaster yesterday falling back sharply as high hopes for a Brexit deal were dashed, while US and European shares surged following the US Senate weekend vote to approve president Donald Trump’s tax-cutting bill.
The pound climbed 1% at one stage against the euro. It traded as high as 87.56p but fell back to 88.33p when the UK prime minister Theresa May and the EU failed late on to reach agreement about moving to the second phase of the Brexit talks.
Philip O’Sullivan, chief economist at Investec Ireland, said there will be many “twists and turns” to come in the Brexit talks and Irish companies should be braced for volatility in sterling.
“We knew Brexit would never be simple, but just how complicated it would be is still a surprise,” said Chris Beauchamp, chief market analyst at IG, in London.
“The late afternoon news about no deal meant that sterling surrendered most of its gains, but there was little help for the FTSE 100, despite gapping higher this morning.
“We now wait until the European Council meeting. It looks like there will be a deal, but just not yet”, Mr Beauchamp said, drawing parallels with the crisis meetings during the eurozone debt crisis.
Last week’s strength in sterling on the back of optimism over Brexit talks weighed on the FTSE 100, which ended the week with a 1.5%.
The index fell to a two-month low as its predominantly dollar-earning constituents were hit by a rise in the currency.
“We are more negative on the UK, we think it will continue to lag. It’s felt as if the excitement is elsewhere and we don’t see that changing overnight,” said Kevin Gardiner, global investment strategist at Rothschild Wealth Management.
Financials across Europe were the biggest boost to gains after US efforts to slash corporate tax rates cleared a major hurdle. In the UK, shares in Barclays, HSBC, Lloyds and RBS rose 0.4% to 2.6%.
“For all the other indices around the world, the tax reform is something everyone’s been keeping an eye on, so that’s definitely the main driver in the US and I think that’s trickling over to Europe as well. We’re see a bit of a relief rally,” John Moore, trader at Berkeley Capital, said.
Banks are seen as the biggest beneficiaries of a cut in the corporate tax rate in the US, and their shares also tend to see the biggest reactions when investors buy into risky assets.
Conversely, shares in more defensive stocks, such as precious metals miners Fresnillo and Randgold Resources, were among the worst performers, both down 2.7% and 1.2%.
UK housebuilders got a boost from favourable data showing a recovery in the UK’s construction industry last month. Persimmon, Taylor Wimpey and Barrat Developments rose 0.5% to 1%.
On Wall Street, the benchmark S&P 500 and Dow industrials rose to record highs, while MSCI’s gauge of stocks across the globe gained 0.45% and hit an all-time peak.
“The big story is indeed the tax reform passage. Until fairly recently, markets were pretty sceptical about whether anything was actually going to happen,” said Brad McMillan, chief investment officer for Commonwealth Financial Network in Massachusetts.
Additional reporting Reuters