FTSE 100 Rises as Pound Slumps on EU-Exit Date

By RIVA GOLD for the Wall Street Journal.

London shares led global markets higher Tuesday as the British pound slumped to a more than three-decade low.

The FTSE 100 index was up more than 1.7% at its highest level since the spring of 2015 and within striking distance of its record, while sterling fell as low as $1.2737 against the dollar.

A weaker pound tends to benefit shares of British exporters. Roughly 75% of earnings from FTSE 100 companies come from outside the U.K., according to Nick Peters, portfolio manager at Fidelity International.

Sterling fell after U.K. Prime Minister Theresa May on Sunday set a March date to begin the process of leaving the European Union. ENLARGE
Sterling fell after U.K. Prime Minister Theresa May on Sunday set a March date to begin the process of leaving the European Union. PHOTO: AGENCE FRANCE-PRESSE/GETTY IMAGES
“The boost to the FTSE 100 has come about because investors believe the U.K. economy is in a worse place,” he said.

London’s FTSE 250 index of midsize companies—which has more U.K. exposure than the 100 but still makes a sizable chunk of its sales abroad—was up 2% at its highest level in more than two decades.

The latest pressure on the British currency, which is down around 13.5% against the dollar this year, came after U.K. Prime Minister Theresa May on Sunday set a March date to begin the process of leaving the European Union and suggested she would prioritize controlling immigration over maintaining full access to the country’s largest trading partner.

The British currency had been trading in a relatively tight range for most of the summer after an initial drop following the U.K. referendum, supported by upbeat surveys on the economy in the immediate aftermath of the vote.

But many analysts said the pound now has plenty of room to fall further. The Bank of England is expected to ease policy again if needed, while ongoing political uncertainty around the Brexit negotiations and a record current-account deficit will likely add to the pressure, strategists said.

“We still see more weakness ahead,” said Allan von Mehren, chief analyst at Danske Bank. “There’s a bit of a battle coming between the U.K. and the EU, and I think that will create uncertainty that will weigh on the pound.”

The dollar was also firmer against most major currencies on Tuesday following a rebound in U.S. manufacturing data on Monday and comments from Federal Reserve Bank of Cleveland President Loretta Mester, who reiterated her call for higher U.S. interest rates.
“Bringing the rate up a little bit is appropriate,” given progress on job creation and inflation, Ms. Mester said, adding that either of the two Fed meetings left this year are eligible for action.

The WSJ Dollar Index, which measures the greenback against a basket of 16 currencies, was up 0.4%.
The dollar rose 0.6% against the yen to ¥102.4120 with the yen touching a two-week low during Asian trading hours as risk-sentiment broadly rebounded, driving investors away from the perceived safety of the Japanese currency.

Elsewhere in Europe, the broader Stoxx Europe 600 index rose 0.6% midday, supported by a rebound in the banking sector. Shares of Deutsche Bank AG were up 0.3%% as markets in Frankfurt reopened from a holiday. The lender has been watched closely by investors in recent sessions amid concerns about a potential fine from the U.S. Justice Department.

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Futures pointed to a small opening gain for the S&P 500, with investors beginning to look ahead to Friday’s U.S. jobs report and the coming third-quarter earnings season.

Recent reporting seasons have disappointed, though many analysts expect the picture to improve as the worst news from the energy sector fades.

“Earnings could skyrocket towards zero by the end of 2016, which would be something of an improvement,” said Stephen Wood, strategist at Russell Investments.

In bond markets, the yield on the 10-year U.S. Treasury note fell slightly to 1.615% from 1.624% on Monday.

Brent crude oil was down 0.7% at $50.54 a barrel.

Tuesday’s moves came on the heels of a mostly positive session in Asia. Japan’s Nikkei Stock Average led gains, adding 0.8% as the yen weakened against the dollar. Shares in Hong Kong rose 0.5%, while Australian shares edged up 0.1% after the Reserve Bank of Australia kept interest rates steady at a record low.

Markets in China were closed for a weeklong holiday.