UKX FTSE 100 Index

By Riva Gold 

Stocks and bond yields pared losses, the British pound charged back from a 31-year low and the dollar came under pressure Tuesday as investors parsed comments from U.K. Prime Minister Theresa May and President-elect Donald Trump.

Futures pointed to a 0.4% opening loss for the S&P 500 despite a 0.9% drop in the dollar as U.S. markets were set to reopen from the Martin Luther King Day holiday and catch up with Monday's declines in Europe and Asia.

"Market participants are really trading political tone," said Stephen Gallo, strategist at BMO Capital Markets.

In a closely watched speech in midday in London, Mrs. May outlined her plans to take the U.K. out of the European Union, confirming media reports published over the weekend that the U.K. wouldn't seek membership in the EU's single market.

While that stance is perceived by many investors as negative for the U.K. currency and U.K. assets, the British pound rose 2.4% to $1.2332 after her speech, in which she also said the government would put a final Brexit deal to vote in both houses of U.K. parliament.

The Stoxx Europe 600 reversed morning losses to trade flat after concerns around Mrs. May's speech sent the index to its biggest daily fall since November on Monday.

Market participants had already widely expected Mrs. May to prioritize control over immigration over its trading relationship with the bloc following weekend media reports that punished the pound and weighed on global stock markets ahead of the speech.

"The most negative aspects of her speech were already out there, and everything else was pretty levelheaded in tone," said Mr. Gallo.

Sterling was also bolstered by data showing U.K. inflation hit a two-year high in December and comments late Monday from Bank of England Gov. Mark Carney that officials are prepared to raise interest rates if price-growth looks set to stay persistently above their annual target.

The moves also came as the WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, fell 0.9%. The euro was up 0.7% against the dollar at $1.0686, while the dollar was down 0.4% against the yen at Yen113.5430.

In his interview with The Wall Street Journal on Friday, President-elect Donald Trump criticized a cornerstone of House Republicans' corporate-tax plan and said the U.S. dollar was already "too strong" in part because China holds down its currency, the yuan.

Some analysts also attributed the move in the dollar to nervousness just days ahead of the presidential inauguration, following steep gains after the November election driven by expectations the new administration would help boost growth and inflation.

"A lack of form for Brexit and for Trump's fiscal policies presently exist, and the market is demanding clarity," said Jane Foley, currency strategist at Dutch lender Rabobank. "Whilst the rally in the dollar into the end of last year was built on hope of reflation, a rally can't sustain on rhetoric alone," she said.

In stock markets, London FTSE 100 index fell 0.9% as the climb in the pound pressured shares of exporters. The index had snapped its longest-ever winning streak on Monday amid concerns an exit from the single market would hurt U.K. companies.

In U.S. premarket trading, shares of Morgan Stanley added 0.1% after the bank beat analyst expectations as it logged its strongest fourth-quarter profit since the financial crisis. Financial shares rose Friday at the start of banks' earnings season, helping rekindle a stalled postelection rally in the sector.

Shares of Reynolds American gained 3.9% premarket, while shares of British American Tobacco fell 1.3% in Europe after the company said it agreed to pay $49.4 billion for the 57.8% of Reynolds American that it doesn't already own, creating the world's largest listed tobacco company by revenue and market value.

Earlier, the stronger yen weighed on stocks in Japan, sending the Nikkei Stock Average down 1.5% in its biggest drop this year. Stocks in Shanghai recovered from early losses to rise 0.2%, ending a five-day losing streak, while the Hang Seng Index added 0.5%.

Australia's S&P/ASX 200 index fell 0.8%, erasing Monday's gains, amid declines in bank and mining stocks.

Copper prices dropped 0.8%, weighing on the sector, even as gold and oil prices moved higher. Gold added 1.4% to $1,212 an ounce, while Brent crude gained 1.3% to $56.57 a barrel.

In government bonds, yields on 10-year U.S. Treasury notes fell to 2.335% from 2.380% on Friday but were off their lowest levels after Mrs. May's speech, while German bund yields fell to 0.227% from 0.256% Monday. U.K. gilt yields dropped to 1.306% from 1.320%, after falling to as low as 1.252% earlier in the session. Yields move inversely to prices.

Jenny Gross,

Ian Walker

, Robb M. Stewart and Jason Douglas contributed to this article.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

January 17, 2017 09:17 ET (14:17 GMT)

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