The UK stock market is having a very happy new year. The FTSE 100, Britain’s benchmark stock index, has posted gains for 12 consecutive trading days. And for the past 10 days, those gains have set new all-time record highs, the longest such streak since the index was created in 1984.
The FTSE 100 is mostly made up of large multinational companies; it has gained 2.4% so far this year, on top of a 14% increase last year.
But scratch the surface and it’s not necessarily all good news. The FTSE’s record run is mostly down to a dramatic drop in the value of the pound. Three-quarters of revenue at FTSE 100 companies is generated abroad, so when earnings are reported in pounds, profits are padded thanks to a more favorable currency conversion. The pound has dropped 18% against the dollar since the UK voted to leave the European Union in June.
How much longer can the FTSE keep up this record run? Well, it depends on how pessimistic currency traders can get. Even though the economic data after the Brexit vote haven’t been as bad as feared—as the Bank of England’s chief economist recently admitted—traders are more focused on the politics of quitting the union.
Those politics are getting very messy. Already this year, the UK’s ambassador to the EU has abruptly resigned, saying the UK’s plan to leave the bloc was muddled on his way out, and the prime minister suggested the UK will almost certainly leave the EU’s lucrative single market (paywall) in a bid to assert greater control over immigration.
HSBC says the UK is hurdling towards a “hard Brexit,” or leaving the EU without retaining any of the benefits of membership a la carte. The pound could drop to $1.10 if that happens, from about $1.21 today (and nearly $1.50 on the eve of the Brexit referendum).