Pound firms, top London stocks retreat before UK confidence vote

LONDON: The British pound firmed against the dollar and euro Wednesday, and London stocks dropped, as traders awaited a confidence vote on British Prime Minister Theresa May's government after parliament voted massively against its Brexit deal.

The pound's rise "would appear to reflect some expectation that... the prospect of no-deal may have been diminished", said Bank of England governor Mark Carney.

"Now I am not giving my opinion -- I am giving the market's initial take," he told a regular meeting with MPs.

"The markets, as the country, are looking to parliament for direction, and one would expect continued volatility," Carney added.

The rising pound tends to weigh on London's benchmark FTSE 100 index since it features many multinationals who earn vast sums in dollars and euros.

London's second tier FTSE 250 was up slightly. Featuring mostly companies operating in the UK, the 250 index is along with the pound seen as a clearer indicator of Britain's future economic health.

"Many people may be surprised that the pound is holding firm and the UK-heavy FTSE 250 index is rising off the back of Theresa May's Brexit vote defeat," noted Russ Mould, investment director at stockbroker AJ Bell.

"In essence the market believes we are going to get more time for negotiations, we're less likely to have a hard, economically-damaging Brexit, or Brexit won't happen at all.

"It seems inevitable that both the pound and the stock market will be volatile for weeks or months to come until we have a definitive answer as to the exact direction of travel for Brexit," Mould added.

Sterling had tanked to a near two-year low soon after the government's proposal on leaving the European Union was soundly beaten late in London on Tuesday, but it soon bounced back as traders bet there would not be a no-deal exit.

With May on Wednesday expected to win a vote of no confidence called by the opposition Labour Party, talk will move to what happens next.

"If we saw May win out, which I think we probably will, then the pound is probably likely to stay as it is, with a lack of direction," said IG analyst Joshua Mahoney.

"If she was to lose it, there would be a lot of volatility and uncertainty coming into play and that would be very negative for the pound," he told AFP from a relatively calm trading floor in London.

Analysts said May could ask to delay Britain's March 29 exit from the bloc as she looks for a more palatable agreement from her EU peers, while there is growing speculation of a general election and even another referendum.

"Momentum is shifting away from the harder Brexit route and towards a number of options ranging from postponement and second referendum. That is pound supportive," said Gavin Friend at National Australia Bank.

But he added: "I don't see the pound rallying much until markets are sure the (ruling) Conservatives have seen off the confidence motion."

In Brussels EU chief negotiator Michel Barnier warned "the risk of a no deal has never seemed so high".

Earlier Wednesday, Asian equity markets diverged after Tuesday's rally that was fuelled by China's plans to cut taxes in a bid to support the country's stuttering economy.

However, traders are growing increasingly worried about the lack of movement in the US over the government shutdown, which is now in its fourth week, with both sides digging their heels in.

- Key figures around 1130 GMT -

Pound/dollar: UP at $1.2865 from $1.2861 at 2140 GMT

Euro/pound: DOWN at 88.55 pence from 88.75 pence

Euro/dollar: DOWN at $1.1384 from $1.1413

Dollar/yen: UP at 108.83 yen from 108.72

London - FTSE 100: DOWN 0.6 percent at 6,850.82 points

Frankfurt - DAX 30: DOWN 0.2 percent at 10,872.66

Paris - CAC 40: FLAT at 4,785.76

EURO STOXX 50: DOWN 0.2 percent at 3,063.26

Tokyo - Nikkei 225: DOWN 0.6 percent at 20,442.75 (close)

Hong Kong - Hang Seng: UP 0.3 percent at 26,902.10 (close)

Shanghai - Composite: FLAT at 2,570.42 (close)

New York - DOW: UP 0.7 percent at 24,065.59 (close)

Oil - Brent Crude: DOWN 34 cents at $60.30 per barrel

Oil - West Texas Intermediate: DOWN 38 cents at $51.73