LONDON MARKETS: FTSE 100 Slides Most Since June As May Says Britain Will Leave EU's Single Market

By Carla Mozee, MarketWatch

U.K. inflation rate hits 2-year high

U.K. stocks suffered their worst loss in six months Tuesday as Prime Minister Theresa May said the U.K. would aim to make a "hard Brexit," essentially a clean break with the European Union.

The FTSE 100 fell 1.5% to close at 7,220.38, its biggest one-day percentage loss since June 27, according to FactSet data.

May, in a highly anticipated speech in London (http://www.marketwatch.com/story/brexit-means-leaving-the-eus-single-market-says-uk-leader-may-2017-01-17), said Britain does "not seek membership of the single market but the greatest possible access to it."

Read:U.K. leader Theresa May's plan for Brexit -- text of her speech in full (http://www.marketwatch.com/story/uk-leader-theresa-mays-plan-for-brexit-text-of-her-speech-in-full-2017-01-17)

May also said the final deal negotiated by British and EU officials will be put to a vote in both houses of the British parliament. That sent the pound surging to intraday highs, pressuring equities. U.K. stocks in recent months have pushed higher on pound weakness, as companies that make profits overseas will see earnings boosted when its translated back into sterling terms.

Sterling soared almost 3% to $1.2391 from $1.2046 late Monday, heading toward its largest one-day rise since October 2008. Against the euro, the pound rose to EUR1.1586, compared with EUR1.1363 on Monday.

"Overall, this speech did deliver some of the much-needed detail that the market has craved since the June vote. The U.K. will not be in the single market, but it still wants access to it through a renegotiated customs union," said Kathleen Brooks, research director at City Index, in a note.

A vote on the Brexit deal in parliament "could limit some of the excesses of some of the Brexiteers," Brooks added. "But, even this concession cannot hide the fact that the U.K. wants the best parts of the EU, with a cherry on the top, which could make the next two years' extremely tense. So, the pound is not out of the woods yet."

The FTSE 100 on Monday dropped 0.2% (http://www.marketwatch.com/story/ftse-100-notches-small-gain-as-pound-slides-on-hard-brexit-fears-2017-01-16), breaking a 14-day winning streak. Monday's loss also broke a string of 12 consecutive all-time closing highs, with the move coming after media reports said May planned to seek a hard Brexit in exchange for greater control of immigration policy.

Movers: A hard Brexit has particular implications for financial institutions based in the U.K., which rely on "passporting" rights for smooth operation within the EU. Most bank shares were holding to gains after May's speech.

See:U.K.'s May offers escape hatch to banks, car makers in Brexit plan speech (http://www.marketwatch.com/story/uks-may-offers-escape-hatch-to-banks-car-makers-in-brexit-plan-speech-2017-01-17)

Barclays PLC (BCS) (BCS) rose 0.2% and Royal Bank of Scotland PLC (RBS.LN) (RBS.LN) picked up 2.5%. Asia-focused Standard Chartered PLC (STAN.LN) climbed 2.8% as the company said it's recently wrapped up $1.6 billion in shipping deals. But HSBC PLC (HSBA.LN) (HSBA.LN) (HSBA.LN) was down 2%.

Meanwhile, Rolls-Royce Holdings PLC shares (RR.LN) (RR.LN) jumped 4.4% after the jet-engine maker said Monday it will pay $810 million to settle corruption investigations (http://www.wsj.com/articles/rolls-royce-to-pay-810-million-to-settle-bribery-case-1484589047)with U.S., British and other authorities.

British American Tobacco shares (BATS.LN)(BATS.LN) swung down 3.8%, among the multinational companies on the FTSE 100 feeling the weight of a stronger pound. The tobacco maker early Tuesday said it would pay $49.4 billion for the 57.8% of Reynolds American Inc. (http://www.marketwatch.com/story/bat-to-pay-49-bln-for-full-control-of-reynolds-2017-01-17)(RAI) that it doesn't already own (http://www.marketwatch.com/story/bat-to-pay-49-bln-for-full-control-of-reynolds-2017-01-17). The move comes after BAT said in October it had made an offer for Reynolds valued at $56.50 a share, or about $47 billion, to take full control.

Economic docket: The U.K.'s annual inflation rate rose to 1.6% in December (http://www.marketwatch.com/story/uk-inflation-hits-2-year-high-beats-views-2017-01-17), with a rise in airfares and food prices contributing to pushing the rate to its highest since July 2014. The rate is moving closer to the Bank of England's target of 2%.

"If signs of the expected slowdown in consumer spending do not materialize soon, sterling stays low and thus inflation forecasts continue to rise, the [Bank of England] may actually start debating taking back some of the stimulus early, with a rate hike the most likely option," said Citi Research in a note.

Bank of England Gov. Mark Carney in a speech Monday said he expects rising prices to hurt household spending in the coming months, resulting in slower economic growth.

(END) Dow Jones Newswires

January 17, 2017 12:20 ET (17:20 GMT)

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