The Pound is in free fall and shows no sign of bottoming out any time soon – but the lower Sterling drops, the higher share prices rise.
The FTSE 100 has smashed through the 7,100 barrier and is heading towards infinity and beyond.
But Bank of England policymakers and economists are not too worried by events.
The FTSE is surging upwards because the earnings of Britain’s biggest companies mostly come from overseas. When sales in these countries are converted into Sterling, businesses automatically benefit from an uplift.
Effectively they are selling the same goods and services for the same price but earning more.
Bond and share prices flattered
The economic situation is different from the last time the FTSE100 burst past 7,000 in March 2015. Then, falling oil prices and unrealistic confidence in a dynamic Eurozone recovery were the drivers.
Now, the weakening pound flatters the price of UK bonds and shares. A fix on the price of the pound can vary minute to minute, but is sitting at the lowest against the US dollar than the markets have seen for more than three decades.
Currently, the pound buys $1.22 and is expected to slump to $1.20 by the end of the year.
Against the euro, the pound is 1.10. The gains and losses on sterling and in The City are all paper transactions.
For instance, as the pound sinks, pension liabilities plaguing FTSE100 companies shrink and yields on gilts have risen. At some stage, these see-saw changes will have some consequences in the real world.
Brexit boost
Brexit is fuelling the weak pound, but shares are doing well apart from their fillip from the value of sterling.
The other key factor is shares do well when interest rates are low and monetary policy underpins the financial system and urges spending.
After the referendum, cutting the interest rate to 0.25% and ploughing cash into the economy through easing spurred investors away from savings and toward investing as the yield of bonds sank.
“A lower bank rate means lower savings rates. It also has the effect of driving down the income available on other assets, such as bonds. This tempts income-hungry investors to buy stocks, pushing up prices,” said fund manager Matt Hudson of investment firm Schroders.
“This accounted for much of the initial rally. More recently it has been more about the weakening UK currency.”
