Pound remains under pressure; UK stocks begin little changed

Summary:

• GBP struggles with political headwinds

• Tory leadership race in focus

• M&S and easyJet face demotion risk

Sterling continues to languish close to a 3-month low against the Euro and near its lowest level since January against the US dollar, with the fallout from last week’s elections providing a headwind to any recovery for the pound. The FTSE has reopened this morning after the long weekend and is trading a little on the soft side, with the benchmark pulling back by around 10 points.  

GBPUSD remains below the $1.27 handle and not far from $1.2605 - the market’s lowest level since January. Source: xStation

Election fallout continues to weigh   

While there are many conclusions that can be drawn from the UK’s results in the recent European elections, the overriding one is that both the Tories and Labour will now likely seek to depart the centre ground to recoup some of their losses. Of the 10 leadership candidates Jeremy Hunt is arguably the most moderate, warning that a no-deal would be political suicide but the chances are that the victor will assume a harder approach.

This means that a compromise deal such as the one put forward by Theresa May seems even less likely and we’re moving closer towards a binary outcome of either no-deal or a second referendum. As far as the markets are concerned, this is not the most constructive for the pound even if it does retain the most beneficial possibility of cancelling Brexit altogether. The increased risk of a no-deal doesn’t look likely to diminish significantly anytime soon, and this provides an asymmetric risk to the downside that will keep sterling bulls cautious for the foreseeable future.

M&S and easyJet face FTSE demotion risk

With less than 10 sessions to go before the next quarterly reshuffle for the FTSE 100, both Marks & Spencer and easyJet are facing a very real risk of demotion from the blue-chip benchmark. Due to the growing impact of index-trackers, being cut from the FTSE 100 could have further reaching consequences for the pair as funds that follow the broader index would be required to sell their holdings.

Even though shares in M&S are trading higher by around 2% on the day, a look back at prior performance makes for pretty grim viewing with a 6-month decline in the stock price of almost 20% and a near 40% drop seen in the past couple of years. A litany of mistakes has contributed to this poor performance and while a demotion wouldn’t materially impact business operations it would likely do more damage to its weary investors and their holdings. As you’d expect it’s a similar story with easyJet, with nearly a quarter of the firm’s value wiped off in the past 6 months and almost a third in the past 2 years.         

Marks and Spencer shares may be gaining today but they remain not far from their lowest level in a decade and could soon be demoted from the FTSE 100. SOurce: xStation