The pound slumped and shares in major banks, housebuilders and construction companies tumbled after the shock election result raised questions over the pace of Brexit talks and prospects for the UK economy.
Sterling fell 2% to $1.2670 while shares in Lloyds Banking Group were down, along with those in Royal Bank of Scotland and housebuilders Barratt and Taylor Wimpey. Shares in fashion retailer Next were also lower on fears that consumer confidence would take a knock.
But with the pound at its lowest level since since Theresa May called the snap election on 18 April, the FTSE 100 was pulled higher as the international companies that dominate the blue chip index stand to benefit from weakness in sterling.
The City was wrongfooted by the election result, which was expected to return an increased majority for May rather than the hung parliament declared just before the London markets opened.
The first clues came in an exit poll that stunned traders when it was published at 10pm on Thursday, described by Samuel Tombs, the chief UK economist at Pantheon Macroeconomics, as a “thunderbolt”.
“Britain’s inconclusive election means it is a question of when, not if, the country heads to the polls again in the near future,” said Tombs.
All eyes were on the pound, which has been the focus of City attention since the vote for Brexit a year ago, amid warnings that a hung parliament could drive the currency lower. While sterling’s weakness pulled up the FTSE 100, which gained around 40 points, or 0.5%, it failed to cushion the domestically focused FTSE 250, which fell by almost 1%, or 180 points.
For analysts at UBS there were concerns about the impact of the election result on the economy. “Such significant political uncertainty will further dampen sentiment and confidence, exacerbating the weakness we have already been starting to see over recent months,” the UBS analysts said.
A debate was also raging on City dealing floors about whether the election outcome was more likely to lead to a soft Brexit, with the UK able to retain access to the single market, and whether talks would start as planned later this month.
Kallum Pickering, an economist at Berenberg, said: “Markets might perceive the near-term uncertainty to be worse than it was after the Brexit vote. However, if a hung parliament forces a cross-party compromise, it could lead to a softer Brexit strategy, and may turn out to be positive in the long run after some serious initial confusion.”
But, he added: “The UK gets weak and wobbly government at the worst possible time, that is, when it has to renegotiate its position in Europe and the world. The Brexit clock is ticking … Until parliament gets its act together the UK will be in no position to start serious Brexit talks on 19 June. After the UK wasted the first three months of the two-year divorce period, why should the EU agree to extend the deadline?”
The employers’ body, the CBI, immediately called on the politicians to keep the political wrangling to a minimum. Carolyn Fairbairn, the CBI director general, said: “This is a serious moment for the UK economy. The priority must be for politicians to get their house in order and form a functioning government, reassure the markets and protect our resilient economy.”
The pound’s slide had been signalled from the moment the shock 10pm exit poll was published, when it dived 2% almost instantly. But had then stabilised through the night while dealers tried to gauge the accuracy of the exit polls. By the time trading began in London hours, it was clear that a hung parliament was inevitable.
Jeremy Cook, the chief economist at World First, said sterling was moving as each seat was called through the night, with the currency staging brief recoveries every time it looked as if the poll had overemphasised Conservative weakness in the polls.
“It is fair to say that the political uncertainty in the UK is rising again and thus might have implications for financial investments,” said Christoph Riniker, the head of equity strategy research at Julius Baer.
But while the UK market was focused on the uncertainty created by outcome of the election, analysts at financial firm IG noted that other markets were calm. Traditional safe havens such as gold and the yen were lower. “It’s something that felt like something of catastrophe … but no one seems to care apart from the UK,” said Joshua Mahony, a market analyst at IG.