Sterling remained under pressure in October amid ongoing nervousness about the UK’s Brexit strategy. The pound reached its lowest level against the US dollar for thirty years and its lowest level against the euro since 2011. During the month, Prime Minister Theresa May confirmed that she intends to invoke Article 50 and start the process of quitting the European Union by the end of March 2017. However, there is still a great deal of uncertainty surrounding the terms of Brexit, and this lack of clarity continued to undermine investor sentiment.
Nevertheless, many UK companies with sizeable international operations have benefited from the pound’s weakness, as their overseas profits are repatriated into sterling. The FTSE 100 Index reached a new intra-day high during October, but ended the month 0.8% lower. Meanwhile, the FTSE 250 Index – which tends to have a higher bias towards UK-centric companies than its blue-chip counterpart – fell by 1.8% over October as a whole.
Brexit continued to dominate macroeconomic and corporate newsflow during October. Budget airlines easyJet and Ryanair issued profits warnings during the month, citing the adverse influence of the weak pound, and IAG – which owns British Airways – also cut its full-year earnings forecast. Elsewhere, the UK Government announced that it was scrapping plans to conduct a retail share offer for its remaining stake in Lloyds Bank, blaming the current environment of “ongoing market volatility”.
Retail sales volumes stagnated during September compared with August, dampened by unusually warm weather, according to the Office for National Statistics (ONS). The British Retail Consortium (BRC) warned that failure to strike a “good Brexit deal” will drive up shop prices; the BRC believes that years of falling prices have left little scope for retailers’ profit margins to absorb additional costs.
The International Monetary Fund (IMF) warned that Brexit could signify the beginning of a wider backlash against globalisation. Looking ahead, the IMF expects UK economic growth to slow down as Brexit-related uncertainties weigh not only on firm’s investment and recruitment decisions, but also on consumers’ purchase plans. The IMF cut its forecast for UK economic growth in 2016 from 1.3% to 1.1%. The EY Item Club warned that the economy’s better-than-expected performance since the Brexit referendum in June was “deceptive” and forecast a “prolonged period” of weaker economic growth against a backdrop of rising inflation, deteriorating consumer spending, and falling business investment.