UK stocks trail in recovery as fears over Brexit cause investor jitters

Traders could be pricing in Brexit uncertainty, Mr Cau said, adding that a rise in the pound versus the dollar over August has also weighed on the FTSE’s big international earners as the greenback slides on currency markets.

Many FTSE 100 firms earn their money in dollars, so a stronger pound means profits are worth less when converted to sterling. The stimulus from central banks and governments has helped global stock markets rebound from their March nadir after Covid-19 fears rattled investors. 

The markets recovery has been led by soaring US stocks, with the S&P 500 up 56pc since its March low to a record high. The latest leg of the US rally was fuelled by the Federal Reserve hinting it will continue with ultra-low interest rates. The US central bank is switching to an average inflation target, meaning it will tolerate higher price rises before lifting rates. The S&P opened at a record high for a fifth straight day on Friday after Fed chairman Jay Powell’s speech the day before.

Mr Cau warned that fears are now mounting over a correction, where shares fall more than 10pc from an index’s 52-week high. The US election, a “jittery bond market” and the second Covid wave in Europe are all “potential headwinds” for global markets, he said.

Joachim Klement, analyst at broker Liberum, said the Fed’s switch to a 2pc average inflation target means interest rate hikes are unlikely. He argued that other central banks, including the Bank of England, will likely follow as reining in support would trigger a rise in the pound against the dollar. He added: “Given the dire economic situation in Europe and the UK, it seems far-fetched to believe the Bank or European Central Bank would consider tightening monetary policy in the next five years. Instead, they are flirting with similar changes as the Fed.”