Markets now turn to assess the prospect of a delayed Brexit and PM’s looming no-confidence vote

This article is more than 1 year old

This article is more than 1 year old

The comprehensive defeat of Theresa May’s Brexit vision subdued markets in Asia, with sterling expected to remain volatile until the result of Wednesday’s no-confidence vote in the prime minister is known.

Sterling sunk to trading at $1.2855 on the dollar early on Wednesday, having steadied after a tumultuous overnight session. May’s crushing loss on Tuesday night and looming no-confidence vote triggered political upheaval that meant investors paused to assess their next options, putting pressure on UK-focused exchange-traded funds. A Tokyo-traded FTSE 100 ETF was down about one percent on Wednesday.

“While the margin of May’s loss was a surprise, the defeat itself was something the market had been pricing in for a long time and it appears that participants covered shorts in the pound after the vote,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities. “The market is now factoring in the March Brexit deadline being extended. In the longer run it may boil down to two scenarios: a no-deal Brexit or no Brexit at all.”

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MSCI’s broadest index of Asia-Pacific shares outside Japan was a touch lower, having swung up on Tuesday after Chinese officials came out in force to signal more measures to stabilise a slowing economy.

On Wednesday, sterling had rallied more than a cent from the day’s lows against the dollar with May’s sizeable defeat seen as forcing Britain to pursue different options. The euro lost 0.1% to $1.1405, extending its decline against the dollar for a fifth session. The single currency has lost nearly 1.5% from a 12-week high on 10 January.

Stephanie Kelly, senior political economist at Aberdeen Standard Investments in Edinburgh, said: “Elections tend to cause sell-offs in markets because they’re inherently uncertain events but the UK situation is more complex than a normal vote.

“The margin of Theresa May’s defeat and the call of no confidence do matter for markets in the short term,” she said adding she expected sterling to be volatile until the result is known.

Australian shares rose 0.2% while Japan’s Nikkei lost 0.7% by midday. China’s blue-chip CSI300 index of Shanghai and Shenzhen shares fell 0.1% on Wednesday. Despite the small loss, it managed to hold on to most of the previous session’s gains, when it rose nearly 2%.

The uncertainty around Brexit and hopes the Fed would pause any further rate rises meant gold held steady on Wednesday. Spot gold was at $1,289.31 per ounce at 2.51am GMT. US gold futures were also firm at $1,288.80 per ounce.

“The safe haven appeal is quite strong as there are rising possibilities of a disorderly Brexit,” said Benjamin Lu, an analyst with Phillip Futures.

China’s central bank on Wednesday made its biggest daily net cash injection via reverse repo operations on record – totalling $51.6bn – in another sign of growing concern over risks facing the slowing economy.

In Tuesday’s session on Wall Street, the S&P 500 gained 1.1% as technology and internet stocks gained on Netflix Inc’s plans to raise fees for US subscribers.

The S&P 500 communication services index, which includes Netflix and Alphabet Inc, jumped 1.7%, while the technology sector tacked on 1.5%.

The China stimulus hints and dovish remarks by one of the U.S. central bank’s most hawkish policymakers also helped lift the U.S. market.

Ester George, president of the Federal Reserve Bank of Kansas City and a voting member of the Fed’s policy-setting committee this year, made the case for patience and caution on interest rate hikes to avoid choking off growth.

Reuters and Associated Press contributed to this report