European stock markets were broadly lower on Tuesday as investors responded to an eagerly awaited speech from British Prime Minister Theresa May, who signaled that the U.K. is increasingly leaning toward what many have termed as a "hard Brexit."
Perversely, the pound sterling rallied and the U.K. stock market, which had been raucous in its gains during the preceding weeks, fell in response to the speech.
The twist of fortune for markets was a simultaneous pledge by May to offer Parliament in London the chance to vote on the final exit deal agreed with the European Union.
Traders took the statement as an invitation to bet that a "hard Brexit" will never happen given that almost all of London's lawmakers backed a vote to remain inside the EU during the lead up to the referendum.
An overwhelming majority are also in favor of remaining within the European single market and customs union, which has led traders to bet that any hard Brexit deal delivered to Parliament by May will eventually be watered down by politicians in both houses.
Curiously, U.K. bank stocks performed strongly into the afternoon while European bank stocks fell. It is possible that investors have taken a dim view of the costs that Europe's banks might face if pressured by politicians to begin moving operations out of London.
The FTSE 100 slumped by 1.46% to 7,220, its biggest one-day decline since the Monday after June's referendum, as dollar earning stocks were hammered by a resurgent sterling.
After 14 straight days of gains that were unbroken until Monday, the FTSE 100 will remain vulnerable to further sterling strength as 75% of the index' revenue are drawn from overseas.
The pound surged by more than 360 points against the dollar to trade above the 1.2300 handle for the first time in more than a week, marking the biggest one-day gain for the pair since 1998. The EUR/GBP exchange rate dropped by 120 points to 0.8640.
In Germany the DAX was down by 0.10% to 11,540 while in France the CAC 40 dropped 0.46% to 4,859. The euro gained 50 ticks against the U.S. dollar to trade briefly above 1.0700 for the first time since early December.
In individual stocks the biggest decliner on London's large-cap benchmark was British American Tobacco (BTI) . The cigarette giant is not just a large U.S. dollar earner, it also increased its offer to buy Reynolds (RAI) by 7%, to $59.64 per share.
In Germany, Deutsche Bank (DB - Get Report) was among the biggest fallers with the stock dropping by 0.5%, while in France, big decliners included ArcelorMittal (MT - Get Report) , which fell by 2% in response to a pullback in commodity prices.
The biggest gainer in Germany was Deutsche Lufthansa (DLAKY) , which rose nearly 5% ahead of the close as the shares rebound from their early January collapse. The airline is now grappling with the effect of an oil price headwind and had seen heavy selling of its shares following a downbeat update from management a fortnight ago.