FTSE and pound surge on strong Tory election showing

The FTSE 100 Index surged by as much as 2 per cent on Friday after a better-than-expected election performance for the Conservatives cheered the City.

London's top-flight climbed by nearly 150 points in early trading adding almost £40 billion to its total value as investors welcomed the prospect of a smooth transition for David Cameron into a second term in Downing Street.

British Gas owner Centrica was a big winner, rising 8 per cent after Labour's defeat dispelled the possibility of an energy price freeze and tighter regulation.

House builders also performed strongly, with Persimmon up 7 per cent and Barratt Developments climbing 6 per cent.

UK-focused banks, who may also have feared intervention by a Labour-led administration, did well too, with state-backed Lloyds Banking Group adding 7 per cent and Royal Bank of Scotland, which is 80 per cent owned by the taxpayer, surging 6 per cent.

Emerging poll results also boosted sterling, with the pound climbing to its highest level against the US dollar since late February - though some of the gains later faded - and also ahead against the euro.

The FTSE 100’s rally saw it add around 76 points in the first few moments before quickly advancing further on the buoyant sentiment.

Vicky Redwood, chief UK economist at Capital Economics, said: "With the Conservatives on course to achieve — or at least get very close to — a majority, the UK General Election result is a surprisingly market-friendly outcome.

“The result removes the risk that the economy suffers a prolonged period of political uncertainty — indeed, the pound has risen by about 2 per cent against the euro.”

Pound surge

The pound's surge on the projected Conservative victory was clouded by the prospect of a referendum on the nation's membership of the European Union.

Sterling jumped the most since 2009 against the euro, and climbed at least 0.9 per cent versus its 16 major peers, more than in the last election in 2010.

"This is a relief rally that we usually get with a Tory win, but medium term it's, 'EU referendum here we come,'" said David Bloom, global head of currency strategy at HSBC Holdings Plc in London. "That is not good for the pound."

The pound surged as much as 2.2 percent versus the euro as results continued to come in, and was 1.9 per cent stronger at 72.47 pence as of 8.31 am.

Britain’s currency rose 1.5 per cent to $1.5471 after touching a more than two-month high of $1.5523. Mr Bloom said $1.55 was “a sustainable rate.”

The Conservative election campaign focused on their economic credentials, with surveys showing them to be the the most-trusted party on managing Britain’s finances.

While a measure of expected volatility in the pound against the euro over the next three months tumbled Friday, it remained higher than the average for the past year.

UK government bonds may also face pressure as the question of Britain's relationship with the EU weighs on investor demand. The securities lost 0.5 per cent since the start of the year, the worst-performing European debt after Greece, according to Bloomberg World Bond Indexes.

PA/Bloomberg