A shock British election result that left no single party with a clear claim to power hit sterling yesterday and left the dollar on course for its best day in over a month.
The outcome of the snap poll, called by Prime Minister Theresa May to try to bolster her parliamentary majority, was a blow to investors who had already weathered major risk events in the United States and Europe the previous day.
But the reaction as it unfolded suggested a more limited impact than after last year’s Brexit vote, which triggered a prolonged decline in the pound and unsettled other assets.
After a sharp initial fall, the pound steadied early in European trading and then began to claw back ground. Safe-haven gold and US Treasuries drifted lower and futures markets pointed to Wall Street opening modestly higher.
“The uncertainty is bad news for sterling,” said Bank of America, Merrill Lynch European equity & cross-asset strategist James Barty.
“I think for the global market it doesn’t matter. Unlike Brexit, this is a very UK-specific thing.”
Bets that another drop in sterling would flatter international firms’ profits pushed London’s FTSE as much as one per cent higher but it was up a more limited 0.4 per cent by mid-session.
Bourses in Frankfurt, Paris and Milan had also slipped back to leave MSCI’s closely-followed 46-country ‘All World’ index down 0.1 per cent and set for its first weekly fall since mid-April.
The pound shed more than two per cent against the dollar, dropping as low as $1.2636 and 88.6 pence per euro – two- and six-month troughs – before recovering all the way to $1.2741 and 87.70.
Yields on 10-year gilts also ticked higher after falling to one per cent.
There was much less drama elsewhere. E-mini futures for the S&P 500 edged up 0.1 per cent. Japan’s Nikkei added 0.5 per cent and MSCI’s broadest index of Asia-Pacific shares outside Japan ended the day all but flat.
The Japanese yen eased to 110.40 per dollar, while the euro was down 0.35 per cent against the US currency at $1.1173.
The single currency had slipped overnight when the European Central Bank cut forecasts for inflation and said it had not discussed scaling back its massive bond-buying campaign, sending bond yields to multi-month lows.
In commodity markets, spot gold was 0.3 per cent lower at $1,274.45 an ounce.
Oil prices remained subdued, with Brent having settled at its lowest since November 29, the eve of an OPEC production cut deal.
US crude futures was flat at $45.63 a barrel, with Brent crude at $47.84. Both benchmarks are down roughly four per cent in what will be a third consecutive weekly fall.