The FTSE 100 fell on Monday as the inverse relationship between London’s leading index and the pound sprang back into life.
A U-turn by the UK government on tax rates saw the pound gain and hit shares in the FTSE 100’s overseas earners.
“The FTSE 100 fell 1% to 6,827, dragged down by miners, financial services and consumer goods specialists. Many of these earn in dollars and so a stronger pound – if even if it just a temporary move – is bad for them,” said Russ Mould, investment director at AJ Bell.
The FTSE 100 has tracked UK assets to the downside since the doomed mini budget, but loses were contained by a weaker pound.
The FTSE 250, however, has suffered dramatically worse as the domestic facing index feels the pressure of uncertainty around the UK economy.
Despite an improvement in the pound in recent days, Liz Truss’s government is still subject to a high level of scrutiny and upcoming events may lead to further volatility.
“The u turn had been inevitable given the market reaction but there’s every likelihood this will buy the UK government time politically but not necessarily from investors,” said Joshua Raymond, Director at financial brokerage XTB.
“The 45p tax cut has taken around £2billion off extra borrowing. That’s it. The UK government is facing extra borrowing of closer to £150bn and at higher interest rates than in the past decade. That’s the problem. Until investors get clarity in the scale of borrowing needed and costs, which means a detailed OBR forecast, the pound Sterling volatility will likely continue.”