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May's call for early polls hits the FTSE

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London - British shares headed for their worst day drop since the aftermath of the Brexit referendum last June after Prime Minister Theresa May said she would call an early election.

The FTSE 100 dropped 1.6percent to its lowest in more than seven weeks as sterling inched higher, further weighing on the index’s stocks, most of which get earnings in foreign currencies. All but one of the blue-chip stocks were in the red.

May called for an early election on June 8, saying it was the only way to guarantee political stability for years ahead as Britain negotiates its way out of the EU.

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Britain’s Prime Minister Theresa May made the announcement yesterday. Traders said it could lead to strengthen the sterling.Photo: ReutersBritain’s Prime Minister Theresa May made the announcement yesterday. Traders said it could lead to strengthen the sterling.Photo: Reuters

“If we have a stronger government pushing for a ‘hard’ Brexit, markets won’t like that. But on the positive side, you would have more stable government for the UK,” said David Stubbs, global market strategist at JP Morgan Asset Management.

“Financial markets have clearly rendered their judgment of (the Brexit process) through sterling,” he said. “Loss of single-market access, if it happens, necessitated a cheaper currency, that’s the calculation markets made.”

Sterling’s weakness combined with stronger-than-expected fundamental economic data had pushed the index to record highs in the past months.

Volatility

Investors can expect significant volatility in sterling over the six weeks until the election as polls indicated levels of support for the governing Conservatives, Stubbs said.

Read also: #Brexit likely to affect SA firms

Traders said the election could eventually lead to a stronger sterling if May’s majority was strengthened and policy was more predictable.

Lower metals and crude-oil prices were already weighing on the commodities-heavy index before May’s announcement.

Mining companies Anglo American, Glencore, Antofagasta, Rio Tinto and BHP Billiton dropped as Chinese iron ore futures fell to three-month lows, with oversupply worries weighing on steel prices.

Oil major BP was also a top faller, down 2.8 percent as the price of crude fell. Brent crude reached an 11-day low after a US government report indicated rising production .

Mid caps and small caps outperformed the blue chips, falling 0.9 and 0.3 percent respectively, but holding near record highs reached in the last trading session.

“I think people have been pleasantly surprised by how sanguine companies’ management teams have been,” said Ian Williams, economist and strategy analyst at Peel Hunt.

“In the last six weeks, the mood of companies presenting has been much more optimistic, and people are asking whether some of the risk has been priced in already.”

The top fallers on the mid-cap index were all commodity-linked stocks, led by iron ore pellet producer Ferrexpo, down 5.2percent, and miner Evraz, down 6.3percent.

Emerging markets-focused fund manager Ashmore was down 2 percent, despite earlier posting net inflows for the first time in nearly three years, as investors turned back to developing regions. 

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