Sterling slide fuels risk-off on U.S. payrolls day

[October 07, 2016]  By Vikram Subhedar

LONDON (Reuters) - Sterling recouped some losses after plunging almost 10 percent on Friday, as growing fears of a "hard" exit by Britain from the European Union sent a shiver through world stocks markets before U.S. jobs data.

The pound had slumped as much as 10 percent in Asia as it crashed through key support levels, triggering a wave of selling. It recovered in European trading but was still down 2.7 percent at $1.2271.

The impact of sterling's slide on other asset classes was relatively muted, though caution prevailed. U.S. stock futures were down 0.3 percent before U.S. payrolls data, which could put pressure on the Federal Reserve to raise interest rates.

European stocks fell 1 percent, dragged down by airlines and other consumer-related sectors.

The STOXX 600 has fallen by around 7 percent since the start of 2016, with investors pulling funds from European equities for 35 straight weeks, the longest streak on record, according to Bank of America Merrill Lynch.

The plunge in the pound, which is poised to fall about 5 percent for the week, lifted London's FTSE as investors bought shares of dividend-paying exporters such as oil majors and mining companies. The UK benchmark is less than 1 percent from record highs.

The pound has come under renewed pressure as expectations grow that Britain's divorce from the EU will be messier and costlier for the economy than expected. British Prime Minister Theresa May on Sunday set a March deadline for beginning the formal departure process from the EU.

"This move has shaken things in sterling and a huge amount of any outstanding positioning will have been washed out and we may be starting from a new, even more nervous footing," Citi trader Sam Underwood wrote in a note to clients.

Sterling's slide spurred another round of bearish forecasts on the currency.

HSBC said on Friday it forecast the pound would drop to $1.10 and parity against the euro by the end of 2017. Morgan Stanley said it expected the currency to retest the session's lows of $1.20 in coming weeks.

"The pound used to be a relatively simple currency that used to trade on cyclical events and data, but now it has become a political and structural currency. This is a recipe for weakness given its twin (budget and current account) deficits," said David Bloom, global head of FX research at HSBC.

POUND ROLL TO PAYROLLS

Focus for market participants in other assets shifts to the U.S. monthly jobs report later in the day. If job creation is robust, it may cement the case for a U.S. rate increase in December.

Economists polled by Reuters forecast U.S. non-farm payrolls to increase by 175,000.

A worker shelters from the rain as he passes the London Stock Exchange in the City of London at lunchtime October 1, 2008. REUTERS/Toby Melville/File Photo

A disorderly reaction to possible U.S. interest rate hikes could disrupt capital flows and heighten asset price volatility in Asia, the International Monetary Fund said on Thursday.

Elsewhere in currency markets, the dollar edged down 0.1 percent against the yen to 103.80 after hitting its highest level in a month on Thursday.

The euro eased 0.3 percent to $1.1120, poised to shed 1 percent for the week.

The dollar held firm after data on Thursday showed the number of Americans filing for unemployment benefits unexpectedly fell last week to near a 43-year low, boding well for Friday's data.

Interest rate futures are now pricing in about a 65 percent chance of a rate hike by December, compared with less than 50 percent late last month.

The 10-year U.S. Treasuries yield rose to a three-week high of 1.746 percent on Thursday before easing slightly to 1.73 percent on Friday.

Gold dropped to $1,252 per ounce, its lowest in three and a half months, after declining 5 percent on the week. It last stood at $1,258.8.

Silver has slumped more than 10 percent so far this week to a four-month low of $17.1525 per ounce.

Oil prices steadied after U.S. crude broke through $50 a barrel overnight, spurred by an informal meeting among the world's biggest producers on output cuts and falling U.S. crude inventories.
 

U.S. crude futures gave up earlier gains and were down 0.4 percent at $50.47, just below Thursday's four-month high of $50.63. Brent fell 0.6 percent but is close to its highest levels this year.

(Reporting by Vikram Subhedar and Marc Jones; Editing by Larry King)

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