Sterling holds at two month high against euro after May defeat

World equity markets on Wednesday held their nerve after the heavy parliamentary defeat of British prime minister Theresa May’s Brexit deal as investors saw potential for legislative deadlock forcing London to delay its departure from the EU.

Ms May's government faces a no confidence vote on Wednesday evening after the shattering rejection of her Brexit blueprint on Tuesday evening left Britain's exit from the European Union in disarray.

Expectations of a softer Brexit - perhaps incorporating the Labour Party’s idea of membership of a permanent customs union - gave support to the pound.

Sterling held at a two-month high against the euro and was largely flat against the dollar after seesawing in a broad 1.5 per cent trading range overnight.

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By shortly after midday, the pound was trading at 88.62 pence per euro, its strongest level since late November, and was down 0.1 per cent at $1.2851.

“We do think it is unlikely that sterling will fall to fresh lows unless the current government falls, and that is unlikely although the risk is not zero,” said Alvin Tan, an FX strategist at Societe Generale in London.

Mr Tan said sterling is valued relatively cheaply, in part because of the lingering possibility that Britain could crash disruptively out of the EU without a deal.

Elsewhere, stock markets had largely priced in the overnight defeat, and for the most part held on to early gains that mirrored earlier resilience in Asian markets.

There, stocks had shrugged off Ms May’s defeat and were lifted by signs that China will take more steps to bolster its slowing economy and the US Federal Reserve might pause its run of interest rate rises.

“Markets seem to be pricing in a greater probability of a ‘soft Brexit’,” said Azad Zangana, a European economist and strategist at Schroders. “However, we believe that investors are getting ahead of themselves.”

The MSCI world equity index, which tracks shares in 47 countries, ceded early gains to slip 0.1 per cent, while European stocks gained 0.2 per cent.

French and Spanish bourses edged up, while Germany’s main index lost 0.1 per cent. Britain’s main equity index dropped as much as 0.6 per cent with investors shifting focus from Brexit to results and news of mergers and acquisitions. – Reuters