LONDON: The pound rebounded further Wednesday, but gains were capped by investor anxiety after Brexit turmoil sent the currency tumbling and set the stage for a potential snap UK election next month.
Global stocks rose, with Hong Kong the star performer on reports -- which were subsequently confirmed -- that city leader Carrie Lam would shelve a loathed extradition bill that sparked months of unrest.
Investors brushed off US President Donald Trump's latest China outburst to push equity markets higher.
Back in London, the pound shot back above $1.22 Wednesday, an increase of one percent from late Tuesday.
Having dived Tuesday to $1.1959 -- the pound's weakest level since 1985 except for a 2016 "flash crash" -- it has since rallied on rising hopes that Britain will not exit the European Union without a deal.
"Sterling was thrown a lifeline by a parliament determined to avoid a no-deal Brexit," said analyst Connor Campbell at trading firm Spreadex, but he also injected a note of caution.
"The complicating factor here, and the reason that sterling's gains... are not even greater, is the potential for a general election."
Prime Minister Boris Johnson headed into a fresh Brexit showdown in parliament after being dealt a stinging defeat over his promise to get Britain out of the EU at any cost next month.
The Conservative leader has proposed holding an early general election on October 15 if lawmakers vote against him again on Wednesday and force him to seek a three-month Brexit extension from Brussels.
Many economists argue that a no-deal departure would hammer the British economy, which risks already falling into recession this quarter.
British business activity shrank already in August, slammed by weakness in the key construction, manufacturing and services sectors, a key survey showed Wednesday.
The purchasing managers' index (PMI) for all UK sectors dropped to 49.7 from 50.3 in July, according to IHS Markit, which compiles the data. A figure below 50 indicates contraction.
"The PMI surveys are so far indicating a 0.1-percent contraction of GDP in the third quarter," which would mean Britain had fallen into recession, noted Chris Williamson, chief business economist at IHS Markit.
Britain's economy unexpectedly shrank in the second quarter of the year.
The official definition of recession is two successive quarters of economic contraction.
- Hong Kong stocks soar -
Elsewhere on Wednesday, Asian markets rose, led by a 3.9-percent surge in Hong Kong.
Shares rallied on the Hang Seng Index, with property and retail firms among the best performers, having taken a hiding over the past few weeks as the demonstrations were increasingly marred by violence.
Later on Wednesday, at 1030 GMT, Hong Kong's embattled leader confirmed the news, announcing that she will permanently shelve an extradition bill that lit the fuse for three months of pro-democracy protests that plunged the city into crisis.
"The government will formally withdraw the bill in order to fully allay public concerns," pro-Beijing chief executive Lam said in a video statement.
In a message that was markedly more conciliatory in tone than her more recent statements, Lam appealed for protesters to abandon violence and to embrace a "dialogue" with the government.
"Let's replace conflicts with conversations and let's look for solutions," she said.
Withdrawing the bill is one of the five key demands of protesters, who have taken to the streets in their millions in the biggest challenge to China's rule of Hong Kong since its handover from the British in 1997.
- Key figures around 1100 GMT -
Pound/dollar: UP at $1.2206 from $1.2081 at 2100 GMT
Euro/pound: DOWN at 90.23 pence from 90.83 pence
Euro/dollar: UP at $1.1012 from $1.0974
Dollar/yen: UP at 106.24 yen from 105.94 yen
London - FTSE 100: UP 0.4 percent at 7,294.57 points
Frankfurt - DAX 30: UP 1.1 percent at 12,037.27
Paris - CAC 40: UP 1.1 percent at 5,527.71
EURO STOXX 50: UP 0.9 percent at 3,451.79
Hong Kong - Hang Seng: UP 3.9 percent at 26,523.23 (close)
Shanghai - Composite: UP 0.9 percent at 2,957.41 (close)
Tokyo - Nikkei 225: UP 0.1 at 20,649.14 (close)
New York - Dow: DOWN 1.1 percent at 26,118.02 (close)
Brent North Sea crude: UP 71 cents at $58.97 per barrel
West Texas Intermediate: UP 68 cents at $54.62