UK stocks recover losses from Brexit as ‘flight to safety’ eases

UK blue-chip stocks had by last night recovered all the losses incurred after last week’s shock European Union referendum result and sterling briefly rallied back above the key $1.35 level against the dollar.

Against the euro, sterling climbed by 0.7 per cent to 82.32p, having hit a low of more than two years of 83.80p earlier in the week.

On Wall Street, the S&P 500 index returned to positive territory for the year. Oil prices crept back towards $50 a barrel, while US and German government bonds were steady – and the dollar and the yen retreated – as a Brexit-fuelled “flight to safety” abated.

"Markets continue to adjust to last week's Brexit decision, with the initial concerns clearly subsiding," said Shaun Osborne, chief FX strategist at Scotiabank.

“Global stocks are a sea of green and sterling volatility fell quite sharply overnight, perhaps helped by the belief that central bank policy settings will have to remain – or become even more – accommodative.

“The dollar itself is broadly lower as calmer markets and firmer commodities help lift risk sentiment.”

Nevertheless, plenty of observers continued to urge caution. "Just as market pricing reflected the belief that Brexit would not happen right up to the day of the June 23rd referendum, there is risk that investors are currently at risk of failing to face up to the severity of the political and economic issues that now confront the UK," said Jane Foley, senior currency strategist at Rabobank.

“The market is reassured by expectations of further easing from a spectrum of central banks. However, the perception that further central bank action is a ‘cure-all’ is remarkably short-sighted,” she added.

“Despite the optimism in the market, the bleak reality is that the UK has a political system led by a lame-duck prime minister and undermined by a split governing party and a dysfunctional opposition.”

But for now, optimism appeared to be the watchword in equity markets as the FTSE 100 rose 3.6 per cent to 6,360 – up 0.3 per cent from where it ended last Thursday – with the energy and basic materials sectors leading the way.

Analysts noted, however, that the more domestically-focused FTSE 250 index, despite rising 3.2 per cent on Tuesday, remained some 7.7 per cent down from its pre-referendum result close.

One Mergers and acquisitions expert has meanwhile said dealmakers have warned that uncertainty over Europe and fears of a Donald Trump presidency in the United States are set to further slow merger and acquisition activity, after global deal volumes in the first half of the year fell 23 per cent.

The Brexit vote has raised concerns of an “exit contagion” spreading across the remaining bloc of 27 countries, which bankers and lawyers believe will dissuade chief executives from embarking on big deals.

"M&A is very much confidence driven," said Gary Posternack, global head of M&A at Barclays. "There have been a number of factors weighing on CEOs and boards in the current market: the regulatory environment, interest rate risk, the US elections and of course, most recently, Brexit."

Advisers said their clients had pressed the pause button on many planned deals, as they focus on managing foreign exchange risks, following the pound’s sharp fall against the dollar and other currencies.

Many believe Deutsche Börse's proposed merger with the London Stock Exchange could become the biggest deal to collapse.

Separately, the chief executives of Britain’s biggest lenders were called into the Bank of England on Wednesday to discuss the impact on the financial system of last week’s vote.

Bank of England officials gave the bosses of big British banks a supportive message about the amount of liquidity in the system.

They also pressed the banks to keep lending to consumers and businesses to avoid a repeat of the credit crunch that hit after Lehman Brothers failed, according to a person briefed on the meeting.

Bankers said it was expected to be the first in a series of mandatory “fireside chats” to monitor the effect of the Brexit vote.

– Copyright The Financial Times Limited 2016