By Josephine Mason and Muvija M
(Reuters) - London-listed stocks most exposed to the British economy fell with the pound on Tuesday as investors worried the country was heading for a chaotic no-deal exit from the European Union or a general election that raises fresh risks.
It is relatively rare for the export-heavy FTSE 100 to move in lockstep with sterling, but losses in companies more exposed to the domestic economy, such as banks and housebuilders, offset gains in big internationally-focussed firms.
The index was down 0.1% at 0930 GMT after climbing initially on sterling's fall to a three-year low, underscoring deepening concerns about the fall-out across the economy from a no-deal Brexit and the growing possibility of an election.
The midcap index (FTMC), traditionally harder hit by Brexit concerns, was also down 0.2%. That compared to a half percentage fall in Europe's main STOXX index.
An election would thrust Brexit onto an uncertain path with three main options: a Brexit-supporting government under Boris Johnson, a Labour government led by socialist Jeremy Corbyn, or a hung parliament that could lead to another referendum.
"In the short term, for many the idea that Corbyn will possibly be the next PM is more scary than a no-deal Brexit," said Markus Huber, trader at City of London Markets.
Stocks considered most exposed to any hit to Britain's wealth resulting from Brexit were the biggest fallers with Lloyds (L:LLOY) and Royal Bank of Scotland (LON:RBS) (RBS) dropped 1.9% each.
RBS and utilities also face the threat of nationalisation if a Labour government was to take charge.
"UK stocks with domestic exposure seem to be in the short term in a no-win situation: on one hand a no-deal Brexit will certainly have a negative impact at first, on the other hand Corbyn as a new PM is to be expected to be highly negative for the UK economy and not just in the short-term," said Huber.
Losses in homebuilders, which are vulnerable to a crash in house prices from an economic shock, were led by a 1.2% drop in the sector's biggest player Barratt (L:BDEV), Britain's biggest housebuilder.
The country's major retailers Morrison (L:MRW) and Marks & Spencer (L:MKS) were also down over 1%. M&S also faces relegation from the FTSE 100.
HIGHER ODDS
Goldman Sachs (NYSE:GS) has raised its odds of a no-deal Brexit to 25% from 20%, but analysts from Swiss bank UBS predicted the market might prove to be oversold.
"We think that investors are placing a higher probability on a no-deal Brexit at the end of October than is currently warranted," the UBS analysts said in a note laying out a number of Brexit scenarios.
"In our view, the most likely course in the weeks ahead is that parliament will succeed in blocking a no-deal Brexit, leading to a general election. Only then might we have some clarity."
Mining heavyweights, which count on China for their profits, and Asia-focussed financials also weighed on the index as trade worries and protests in Hong Kong continued.
Among single stock moves, DS Smith (L:SMDS) slid 3% on the FTSE 100 as investors took note of the packaging company's comments that volatility in the macro-economic environment continued even as it reaffirmed annual targets.
Plumbing products company Ferguson (L:FERG), meanwhile, outperformed the index with a 2% rise after saying it would separate its UK operations.
Among midcaps, Restaurant Group (L:RTN) tumbled 13%, set for its worst day since November, and sat at the bottom of midcap index after posting a loss versus a year-ago profit, while small-cap XAAR (L:XAR) plunged 29% to a 10-year low after warning on annual results.