U.K. blue-chip stocks lost ground Monday, getting squeezed by a rally in the pound that came after reports the EU has agreed on the terms of a Brexit transition deal.
Analysts were also pinning the retreat in part on expectations that the Bank of England and the U.S. Federal Reserve will signal this week how their monetary policies may be tightening.
Micro Focus International PLC’s stock was the FTSE 100’s biggest loser as the software maker warned on its outlook and said its CEO has resigned.
How markets are moving
The FTSE 100 index UKX, -1.35% slumped 1.3% to 7,072.70, adding to a 0.8% loss from last week.
The pound GBPUSD, +0.9251% jumped to $1.4017, up from $1.3944 late Friday in New York.
What’s driving markets
Sterling’s rally came after the European Union agreed on the broad terms of a two-year transition period for the U.K. when Brexit kicks in next year. The Wall Street Journal reported that EU diplomats dealing with Brexit on Monday had approved the agreement, just hours before the trade bloc and the U.K.’s Brexit negotiators, Michel Barnier and David Davis, were set to meet in Brussels.
A stronger pound sometimes weighs on the FTSE 100 as about 75% of the benchmark’s revenue is made overseas, and that revenue therefore shrinks when translated back into sterling.
Traders also dumped stocks ahead of two important central bank meetings later in the week. A BOE monetary policy decision is expected on Thursday after a U.S. Fed decision on Wednesday. The U.S. central bank is expected to raise interest rates for the first time this year, while analysts say the BOE could hint at a rate rise in May.
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Concerns over trade wars further lingered in the back of investors’ minds. The Trump administration has taken a hawkish stance on U.S. trade with China and is moving ahead with tariffs on foreign steel and aluminum.
Read: U.S. soybeans would be China’s biggest weapon in a trade war
And see: Trump’s most market-rattling trade blasts are still to come, warns Pimco
What strategists are saying
“While investors remain concerned about tensions between the U.S. and the rest of the world over trade, it’s also set to be an important week for the U.S. and U.K. economies, with the U.S. central bank set to pull the trigger on another rate increase this week at a time when some early concerns about rising inflation have subsided to a certain extent,” said Michael Hewson, chief market analyst at CMC Markets UK, in a note.
“The U.K. is facing an important week, and while no changes in monetary policy are expected on Thursday, the latest inflation numbers, due tomorrow, along with wages on Wednesday, are expected to point to a narrowing gap between the two which could be supportive of a possible tightening of interest-rate policy in the coming months,” Hewson added.
Read: Pound could surge in ‘frenetic’ week of Brexit and BOE news, ING says
Stock movers
Micro Focus shares MCRO, -54.90% dived 55% after the company said CEO Chris Hsu has resigned and warned that revenue for fiscal 2018 will fall more than previously anticipated.
On the upside, Hammerson PLC shares HMSO, +23.72% soared 23% for the FTSE 100’s biggest gain. The move came after the mall owner drew and rejected a 4.9 billion-pound ($6.9 billion) takeover offer from French real-estate investment company Klepierre SA LI, -3.94% , whose shares were down 4%.
William Hill PLC shares WMH, +4.59% rose 4.5% along with other British gambling companies as a U.K. government crackdown on a key business — fixed-odds betting terminals — looked like it could be less drastic than feared.
A commission is “recommending maximum stakes on fixed-odds betting terminals should be cut to £30, not the £2 as feared,” said Neil Wilson, ETX Capital’s senior market analyst, in a note. “This should be a relief for the sector as the worst-case scenario looks to have been avoided.”
Barclays PLC BARC, +4.06% BCS, +0.86% tacked on 4% after the British bank said activist shareholder Sherborne Investors Management LP has acquired a 5.2% stake.
Melrose Industries PLC MRO, -0.98% on Monday lowered the acceptance condition for its hostile 8.1 billion-pound ($11.3 billion) offer for GKN PLC GKN, +0.70% , meaning it is lowering the barrier to the success of its takeover bid. In addition, Melrose said it will pay up to £1 billion into GKN’s pension scheme over the period of ownership. Shares of GKN were up 0.7%, while shares of Melrose dropped 0.9%.