Markets shaken as Brexit deal comes under attack

The pound has fallen sharply while banking and housebuilding stocks have been hammered after the draft Brexit deal sparked political turmoil.

Sterling was more than two cents lower against the dollar at less than $1.28 in the wake of Dominic Raab's decision to quit as Brexit secretary - and it was also down by two cents against the euro at €1.13.

The declines - the largest daily drops for over a year - intensified as a steady stream of resignation letters arrived at Number 10.

The pound was trading at $1.2750 as the stock market closed after a bruising day.

Royal Bank of Scotland (LSE: RBS.L - news) led the FTSE 100 fallers, down 9.6% - its biggest one day drop since the day the Brexit referendum result was declared in 2016.

Big housebuilders such as Barratt Developments (Frankfurt: 859551 - news) , Taylor Wimpey (LSE: TW.L - news) and Persimmon (Frankfurt: 882058 - news) were close behind.

The wider FTSE 100 was barely affected - recovering some ground late on to end Thursday trading four points up.

That was put down to the pound's fall providing a boost to the sterling value of the top-flight's multinationals, whose earnings are largely in foreign currencies.

The second-tier FTSE 250 index, which has more of an exposure to the UK economy, was down by 1.7%.

Major European indices - along with US stocks - endured falls as investors fretted over the possibility of a "no-deal" Brexit scenario arising from the political crisis.

The UK market behaviour was in tune with advice from US bank Citi's equity strategists that its clients should "focus on both Brexit and Corbyn hedges" - acknowledging the possibility that the government could collapse and be replaced with a Labour administration.

That is because Theresa May is facing not only parliamentary opposition to her deal but also the threat of a leadership challenge amid anger over the terms across her party.

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Chris Beauchamp, chief market analyst at IG (Frankfurt: A0EARV - news) , said: "As the steady drip of resignations hits the government, the UK's deal with the EU appears to be dead in the water already.

"Risk appetite has taken a hit across the board."

The falls for banking stocks came after state-backed RBS revealed last month that it was putting aside £100m to guard against a "more uncertain economic outlook" ahead of Brexit.

Housebuilders have also revealed their exposure to the uncertainty, with Taylor Wimpey saying earlier this week that there were "signs of customer caution" and that it expects sales volumes will fail to grow next year.

At the same time, house price growth has slowed sharply.

Retailers were also hit on Thursday, with Marks & Spencer (Frankfurt: 534418 - news) down 6% and rival Next (Frankfurt: 779551 - news) by 5% - with the market also reacting to weaker-than-expected retail sales figures for October.

Currency markets have been in a volatile mood in recent weeks amid the changing prospects for a Brexit deal.

The pound had crept above $1.30 against the dollar on Wednesday after it emerged that UK and EU officials had agreed a draft deal, with gains only muted given the difficult task of winning political backing for it.

Ratings agency Moody's has described the agreement as a positive step but warned that it was "far from the end of the process" and that its passage through parliament was far from certain.

Colin Ellis, Moody's chief credit officer for Europe, Middle East and Africa, said: "If the UK parliament does not support the agreement then - in the absence of further developments - the EU and the UK will be heading for a 'no-deal' Brexit by default.

"As we have said previously, that would have significant negative consequences for a range of issuers."

Experts including the Bank of England expect a sharp shock to the economy if there is a no-deal withdrawal and the UK's independent fiscal watchdog has drawn comparisons with the impact of the three-day week in 1974.