The FTSE 100 surged Thursday as overseas earners jumped on a weakening pound amid rising concerns about the UK’s economic health.
Negative moves by retail shares Marks & Spencer, Sainsbury’s and Tesco were insufficient to derail a rally driven by multinationals listed on London as sterling’s inverse relationship with the FTSE 100 kicked in. Today’s trade is a perfect example of why the FTSE 100 is by no means a representation of the UK economy.
The FTSE 100 is often seen as a defensive index partly due to its weighting to overseas earners who tend to benefit from a weaker pound.
On many occasions, the weaker pound results from a bid in the dollar due to financial market risk aversion. However, today, the weaker pound is the consequence of concerns about the UK economy, which are sending bond yields to levels not seen for many years.
Slowly souring sentiment towards the UK has picked up this week as concerns mount about the country’s fiscal health and economic outlook caused by policy decisions by the Labour.
“Turmoil in the markets implies a massive loss of confidence in the UK government. The 30-year gilt yield briefly hit 5.445%, surpassing the Liz Truss crisis period, and the pound slumped to $1.2256 against the US dollar which is the lowest level since November 2023,” said Russ Mould, investment director at AJ Bell.
“The feel-good factor around the UK following last summer’s general election has quickly disappeared and turned to gloom as companies brace themselves for higher costs and consumers worry about job security and the cost of living going up again.
“Investors are worried about extra borrowing by the government to achieve its plans. However, it is worth noting that the pound remains considerably stronger than when Liz Truss briefly ran the country. The UK is also not alone in seeing a higher cost of borrowing for the government as the US has also seen higher yields.”
As the pound sank against the dollar, companies that report earnings in dollars jumped to the top of the FTSE 100 leaderboard. Mining companies led the index higher, with Antofagasta storming 4.9% higher. Anglo American and precious metals miner Fresnillo gained more than 4%.
Smith & Nephew, Shell, InterContinetal Hotels, and AstraZeneca all rose on little else than a weaker pound.
A raft of retailers including M&S, Tesco and B&M reported on Thursday. The market reaction was hostile. Sales growth hasn’t been enough to keep investors happy, with expectations high going into results. The concerns around the UK economy will not help matters for the companies that are largely reliant on the UK for earnings.
M&S shares plummeted 6% despite the group having its strongest trading period ever over the Christmas break.
“Despite reporting resilient Christmas performance across the board, retailers Tesco, Marks & Spencer and B&M saw their shares come under pressure as the glass half empty market seized on any traces of negativity. The wider backdrop of surging UK gilt yields and a slump in the pound was doing nothing for sentiment towards domestic stocks,” Russ Mould explained.
Tesco shares were 1% and the time of writing and dragged Sainsbury’s down with them.