European stocks opened higher on Friday, defying a UK election result that looked set to throw Britain into fresh political turmoil and the country’s currency on track for its biggest one-day loss of the year.
The British capital’s benchmark FTSE 100 index gained 0.7 percent in initial deals on Friday, feeding off a weaker currency in the wake of Prime Minister Theresa May’s losses in Thursday’s election.
The FTSE 100 has closely tracked developments in the British pound in recent months, tending to rise when the currency falls and vice versa. Multinational companies dominate the index and benefit from a weaker currency that makes their exports more competitive.
In contrast, banks, housebuilders and mid-caps suffered losses amid rising uncertainty about the government’s leadership ahead of crucial Brexit negotiations. Their business is more domestically-focused which is why they have less to gain from a weak pound.
In the eurozone, Frankfurt’s DAX 30 index surged past the psychologically important mark of 12,800 points, while the Paris CAC 40 was 0.2 percent higher. Asian stock markets were also mostly higher as traders took the prospect of political turmoil in Britain in their stride.
On Friday, the British pound was, however, on track for its biggest one-day drop this year, falling two percent to $1.2698 after sliding as much as 2.5 percent to $1.2636 in early European trade – its weakest level since April 18.
Craig Erlam, London-based senior market analyst at OANDA, told DW that a hung parliament was the “worst outcome from a markets perspective” as it created more uncertainty and would further reduce the already short timeline to secure a Brexit deal for Britain.
But Minori Uchida, head of global market research at Bank of Tokyo-Mitsubishi UFJ, believes that a likely coalition government could even more conducive to Britain’s economy.
“May’s setback could lead to a soft Brexit, which is not so bad for the British economy in the long run,” he told the news agency AFP.
Despite its substantial fall, sterling is still far from the record drop on June 24 last year when it slumped 8.1 percent in the wake of the Brexit referendum. To crack the pound’s 10-biggest one-day drops, sterling would need to close lower by 3 percent or more.