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Pound pummelled and banks hurt over Brexit political crisis

A series of resignations over the UK’s draft agreement with the EU have created fresh uncertainty for currency and share traders.

The pound has fallen sharply while banking and housebuilding stocks have been hammered after the draft Brexit deal sparked political turmoil.

Sterling was more than two cents lower against the dollar at less than $1.28 in the wake of Dominic Raab’s decision to quit as Brexit secretary on Thursday morning – and it was also down by two cents against the euro at €1.13.

The declines – the largest daily drops for over a year – intensified as a steady stream of resignation letters arrived at Number 10.

Despite a partial recovery during a defiant news conference by Theresa May, the pound remained on course for its worst day against the single European currency since the Brexit referendum result was declared.

Former chancellor Ken Clarke told Sky’s Ian King Live he had become “very worried” about sterling, saying the Bank of England may need to consider raising interest rates if the squeeze on the currency continued to tighten.

It was also a bruising day on the stock market.

Royal Bank of Scotland led the FTSE 100 fallers, down 9.6% – its biggest one day drop since the June 2016 vote declaration.

Big housebuilders such as Barratt Developments, Taylor Wimpey and Persimmon were close behind – losing more than £1.6bn of collective market value. Retailers M&S and Next were down 5% and 4% respectively.

However the wider FTSE 100 was barely affected, recovering some ground late on to end Thursday trading four points up.

That was put down to the pound’s fall providing a boost to the sterling value of the top-flight’s multinationals, whose earnings are largely in foreign currencies.

The second-tier FTSE 250 index, which has more of an exposure to the UK economy, was down by 1.7%.

Major European indices also lost ground but US stocks recovered early losses on a Financial Times report that the White House was planning to suspend further tariffs on Chinese imports to allow trade war peace talks.

The earlier UK market behaviour was in tune with advice from US bank Citi’s equity strategists that its clients should “focus on both Brexit and Corbyn hedges” – acknowledging the possibility that the government could collapse and be replaced with a Labour administration.

That is because Theresa May is facing not only parliamentary opposition to her deal but also the threat of a leadership challenge amid anger over the terms across her party.

:: Rees-Mogg submits no confidence letter

Chris Beauchamp, chief market analyst at IG, said: “As the steady drip of resignations hits the government, the UK’s deal with the EU appears to be dead in the water already.

“Risk appetite has taken a hit across the board.”

The falls for banking stocks came after state-backed RBS revealed last month that it was putting aside £100m to guard against a “more uncertain economic outlook” ahead of Brexit.

Housebuilders have also revealed their exposure to the uncertainty, with Taylor Wimpey saying earlier this week that there were “signs of customer caution” and that it expects sales volumes will fail to grow next year.

At the same time, house price growth has slowed sharply.

Currency markets have been in a volatile mood in recent weeks amid the changing prospects for a Brexit deal.

The pound had crept above $1.30 against the dollar on Wednesday after it emerged that UK and EU officials had agreed a draft deal, with gains only muted given the difficult task of winning political backing for it.

Ratings agency Moody’s has described the agreement as a positive step but warned that it was “far from the end of the process” and that its passage through parliament was far from certain.

Colin Ellis, Moody’s chief credit officer for Europe, Middle East and Africa, said: “If the UK parliament does not support the agreement then – in the absence of further developments – the EU and the UK will be heading for a ‘no-deal’ Brexit by default.

“As we have said previously, that would have significant negative consequences for a range of issuers.”

Experts including the Bank of England expect a sharp shock to the economy if there is a no-deal withdrawal and the UK’s independent fiscal watchdog has drawn comparisons with the impact of the three-day week in 1974.

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