The FTSE 100 is within striking distance of a new record; the pound has fallen sharply again. Why? And should we be celebrating of worrying?
The FTSE 100 closed at 6,983 yesterday, just 121 points shy of all the all-time record closing price set in April of last year.
The FTSE 100 is a very international index, many of its members are multinational companies, which enjoy most of their earnings overseas. This index is as much a reflection of the global economy, especially commodity prices, as it is the UK economy. That is why, in the past, it has done well when the UK economy has been struggling.
The FTSE 250 bears a much closer correlation to the UK economy, this also did well yesterday, and likewise is within a whisker of the record for this index.
Meanwhile sterling tumbled, falling below 1.29 dollars to the pound, close to a post-EU referendum low, and to less than 1.15 euros to the pound, a three-year low.
The FTSE 100 did well on the back of the cheaper pound because when the foreign earnings of companies listed on the index are converted to sterling, they are boosted. The FTSE 250 did well, because there is a perception that the falling pound will help exporters.
But the falling pound will also lead to a one-off jump in inflation. This will mean that prices may well rise faster than wages, which will hit consumer spending in 18 months or so time, and then for a year or so. This happened after the fall in the pound after 2008.
So far, in percentage terms, the fall in sterling is less than that seen in 2008. But the fall against the euro is now getting more serious. Although sterling fell to near-parity with the euro after the 2008 crisis, it was only less than 1.10 euros for a short period of time. If sterling falls much further, and then stays there, the inflation effect may be similar to that experienced after 2008 through to the first two years of this decade, when inflation peaked at over 5%.
There were two main reasons for the fall in sterling. There was good data on the US economy yesterday, which seemed to confirm the view that US rates will rise later in the year. When the markets expect US rates rises, the dollar tends to rise too.
But then that explanation only goes so far. The fall against the euro was even steeper.
That was surely down to Mrs May’s announcement at the Conservative Party Conference that Article 50 will be announced in March next year.
It is odd that the Prime Minister is in such a hurry. It is going to be very difficult to advance negotiations with the rest of the EU this side of French and German elections due next year. Bearing in mind that one of the favourites to become the next French President, a certain Nicholas Sarkozy, has made noises about be willing to renegotiate the EU treaty to keep the UK onside, one would have thought that a more logical choice would have been to delay Article 50 until the result of the French election is known.
Maybe, Mrs May was not quite the Remain believer that she says she was.
