The pound slumped 0.5 per cent against the dollar today as the US presidential election battle failed to produce an early result and looks set to continue for days.
At midnight, the pound was trading at $1.315 but dropped to $1.290 earlier this morning before settling at around $1.300 in the afternoon.
Leading up to election day, markets had been pricing in a clear sweep for Joe Biden, with the US dollar falling on expectations of increased fiscal stimulus.
The dollar also gained against a basket of currencies as investors looked for safe havens amid extended uncertainty, and the Dow Jones was up by 2.2 per cent.
Nigel Green, of financial advisers deVere Group, said the ‘monumental uncertainty in the world’s biggest economy is going to send global stock markets into a tailspin’.
He added: ‘The election is down to the wire and the final result will shape global financial markets for years to come.’
The FTSE 100 index opened 1.3 per cent lower before swiftly recovering. Just before 3.30pm UK time, the blue chip index was up 1.5 per cent or 86.54 points to 5,873.31.
This week: The pound has fallen back against the dollar after gaining ground earlier this week
2020: The pound plunged against the dollar when the coronavirus crisis began in March but has since recovered to levels seen around the start of the year
On the strength of the dollar, Russ Mould, investment director at AJ Bell, said: ‘The dollar has subsequently bounced back to reflect the potential change in the outcome of the election.
‘A stronger dollar versus the pound is good for the large number of stocks in the FTSE 100 which have overseas earnings, thus explaining why the UK index has emerged relatively unscathed from the election updates. It fell at the market open but quickly recovered to trade almost flat at 5,780.
‘US Treasury yields had previously been moving higher on expectations of big US government spending but they’ve subsequently reversed direction as the voting results come in, with the 10-year bonds falling from 0.94 per cent to below 0.8 per cent, which is a significant movement.’
Speaking to This is Money, John Chatfield-Roberts, head of strategy at Jupiter Merlin Portfolios, said: ‘In times of uncertainty, people flock to safe havens, and the dollar is one of the best.
US president Donald Trump (pictured at the White House today) is battling to keep his position
‘For sterling investors, this means any investments they own, such as gold or US shares, that are priced in US dollars will increase in value in sterling terms.’
Meanwhile, Randeep Somel, equities fund manager at M&G Investment, said: ‘From an investment perspective, the markets have not been very volatile throughout today.
‘They seemed satisfied to know that there is unlikely to be a ‘blue wave’ – a Democratic clean sweep of both houses of Congress and the Presidency – meaning the likelihood of large tax increases and increased regulation from the next administration is low.’
The knife-edge US election has also seen London’s blue chip FTSE 100 index endure a volatile start to trading as investors fret over an uncertain result.
Traders sit in the trading room of the Frankfurt Stock Exchange in front of their monitors today
An display board shows the DAX at the Deutsche Boerse stock exchange in Frankfurt today
Even before the US presidential row broke out, analysts thought the pound looked set for a rough ride this month.
Is a a 2000-style legal battle on the cards?
One expert at Legal & General Investment Management thinks the election battle and its impact on markets could pan out in one of three ways.
Lars Kreckel, a strategist at Legal & General Investment Management, said: ‘Firstly, taking a few days to count the votes, which is largely expected and should not have a big impact on markets;
‘Secondly, a 2000-style legal battle that runs into December. The S&P 500 index was off by 8% during that period, though some of this could be ascribed to the bear market that was already underway. With a different expectations this time round, we should expect the impact to be smaller.
‘Finally, the tail risk is one where the decision drags closer to inauguration day and enters uncharted territory. While uncertainty would rise a lot, the market impact should be capped by the limited impact this scenario would have on S&P 500 profits.’
‘The pound could be in for a long, hard November’, said Martin Miller, a foreign exchange analyst at Thomson Reuters.
He added: ‘It’s under pressure as lockdown restrictions tighten in England, uncertainty over Brexit persists and the daily chart points to further weakness.’
While calm was restored in London following the initial sharp fall, the Dax in Germany remained 0.6 per cent lower, though France’s Cac 40 was 0.2 per cent higher.
The Dow Jones Industrial Average closed 2.06 per cent higher at 27480.03 last night, while the Nasdaq composite added 1.9 per cent.
Today, US markets are performing strongly again, with the Dow Jones up 2.22 per cent or 611.21 points to 28,091.24.
The S&P 500 was up 2.97 per cent or 100.08 to 3,469.24 just before 3pm UK time, while the Nasdaq 100 jumped over 4 per cent or 517.10 to 11,797.01.
Last night, the risk-on attitude was witnessed across the board as industrial metals such as copper, silver, platinum and palladium racked up strong gains, according to David Madden, an analyst at CMC Markets UK, said.
He added: ‘Like with stocks, it is possible that the metals were recouping some of the ground that they lost last week. Gold’s inverse relationship with the US dollar worked in its favour.
‘The energy market joined in on the bullish move too, and even though WTI and Brent crude pushed higher in the past two sessions, they have only pulled back roughly half of what they lost in the previous week.’
Meanwhile, Susannah Streeter, an analyst at Hargreaves Lansdown, said that with Donald Trump already claiming victory even though millions of votes are still uncounted, investors may have to ‘belt up and brace themselves for some volatile sessions of trading ahead.’
UK service sector close to ‘stalling’
While all eyes are on the US at present, Britain is facing its own economic challenges this winter.
Fresh figures from IGS Markit today revealed that the country’s crucial service sector is faltering again.
The recovery in Britain’s service sector slowed sharply in October as a surge in coronavirus cases and new restrictions knocked the economy.
The IHS Markit/Cips services purchasing managers’ index, which is a closely followed measure of the sector’s health, fell to 51.4 in October, down heavily from 56.1 a month earlier.
The responses to the survey were collected before Prime Minister Boris Johnson announced a new lockdown for England at the weekend.
Pubs, restaurants, gyms and non-essential shops will have to close from Thursday. Economists say the new measures will hit the UK economy hard. It makes it likely that the services PMI gauge will slump into negative territory next month.
The UK service sector was close to stalling even before the announcement of lockdown two in England,’ Tim Moore, economics director at IHS Markit, said.
Duncan Brock, group director at the Cips, said Britain’s service sector was set to enter a ‘deep freeze’ amid the second lockdown.