The pound and equities tumbled on Monday after Theresa May delayed the parliamentary vote on her Brexit deal, deepening the uncertainty over Britain’s future relationship with the EU that has dominated UK markets since the referendum vote.
In a turbulent day’s trading, sterling’s drop accelerated after Mrs May said the government would step up preparations for the UK leaving the EU at the end of March without a deal.
She conceded that the agreement she brought back from Brussels would have been rejected by parliament in a vote that had been scheduled for Tuesday.
That sent the pound down as much as 1.7 per cent to a 20-month low of just above the $1.25 mark, although the drop eased to 1.3 per cent by the end of the London trading day.
It also fell sharply against the euro, with a 1.1 per cent drop, alongside declines for both the benchmark FTSE 100 and FTSE 250 indices.
The unpopularity of the deal that Mrs May returned with from Brussels had left traders and investors wary of trading sterling in recent weeks.
Yet the decision to postpone has been taken by investors as a big defeat for the UK government and one that heightens the risk of Britain leaving the EU without a deal.
“The problem is that Brexit is currently a bit like Russian dolls: one unknown opens up to another one and another one and another one,” said Christophe Lalo, head of FX overlay solutions at Avalon Capital Partners. “What markets hate most as you know is not so much bad news but rather unforeseen news.”
Business reacted with horror to yet another delay in clearing the Brexit fog, with the CBI warning that the country risked sliding “towards a national crisis”.
One FTSE 100 chief executive said that business would ignore the political turmoil under way after tomorrow’s vote was delayed, and “just get on with planning for a no deal”.
“That’s now the norm,” he said. “You’d have to be stupid at this point to do anything different.”
In a sign of investors’ nervousness over the potential ramifications for the economy, UK government bonds rallied.
The yield on the benchmark 10-year gilt dropped 10 basis points to 1.17 per cent, capping a day that began with weak UK industrial and production figures for October.
Analysts at Bank of America Merrill Lynch noted that “in the near term, uncertainty is weighing on the soft and hard data”.
The view was echoed by Carolyn Fairbairn, director-general of the CBI, who told the Financial Times that the current political turmoil was now having serious economic impact.
“We really worry that the economy and jobs will suffer,” she said. “What we know is that the vast majority of firms which have put in place contingency plans for a no deal will implement them by the end of the year.”
Ms Fairbairn said that today’s vote deferral meant business had to plan for a no deal, for which it urgently required more help.
A FTSE 100 chairman said Mrs May must believe there was some “leeway in Europe” to have delayed tomorrow’s vote.
The prime minister told parliament she would seek reassurances from the EU over the status of the Irish border, a major sticking point for many MPs with her deal.
“This is tantamount to another loss for the PM. That’s how the FX market is trading it. What we don’t know for now is how many votes the PM would have lost by, but pulling the vote suggests that it would have been in excess of 100 against,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets.
“So, though it is not exactly the same thing as a defeat in parliament, it opens up some of the same degree of political uncertainty that a loss in a vote would have done.”
The FTSE 100 closed down 0.8 per cent at 6721.54, while the FTSE 250, whose member companies are more exposed to the UK economy, finished almost 2 per cent weaker at 17492.31.
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