Banks lead European stocks lower as UK-EU trade concerns mount

Global stocks fell on Friday after strong warnings from EU and UK leaders that Britain could leave Europe without a trade deal, with London-bank shares bearing the brunt of the selling.

London’s FTSE 100 and the region-wide Stoxx 600 indices both closed down 0.8 per cent after Ursula von der Leyen, European Commission president, told EU leaders that a no-deal outcome was the most probable scenario from make-or-break trade talks this week.

UK prime minister Boris Johnson issued a similar warning on Thursday evening, then said on Friday that Britain required a “big offer, a big change” from the EU after differences on competition law and fishing rights remained unresolved.

The political tumult in Europe combined with a record number of coronavirus cases in the US also weighed on Wall Street. The large-cap S&P 500 index was down 0.7 per cent at lunchtime in New York and the tech-heavy Nasdaq Composite slid 1.3 per cent.

“The market is beginning to finally price the real risk of a no-deal Brexit,” said Ben Laidler, chief executive of Tower Hudson Research. He forecast that the talks would slip past their Sunday deadline and produce a slimmed-down deal that provided a minor improvement to World Trade Organization terms.

“Amid year-end investor fatigue, there is some de-risking ahead of this weekend as a Brexit deal hangs in the balance,” said Emmanuel Cao, head of European equity strategy at Barclays, who added that “investors were mostly positioned for a deal”.

The FTSE 350 sub-index of bank shares fell 2.1 per cent with domestically focused lenders suffering the most. NatWest lost 6.7 per cent of its value while Lloyds Banking Group dropped 4.5 per cent. Financial shares were also the worst performers on the Stoxx 600.

Column chart of % change showing NatWest shares heading for their worst week since June

Jason Borbora-Sheen, multi-asset portfolio manager at fund manager Ninety One, said: “Market expectations are around 60-40 that there will be a deal.

“The way this wrangling plays out is either very last minute or with extended deadlines,” he added. “It’s in no one’s interest to storm off, so I think it will ultimately resolve itself.”

But there is also “little upside” for the UK economy if a trade deal were to be agreed, said Peter Westaway, chief European economist at Vanguard.

“The deal that is being discussed would be a bare-bones trading arrangement,” he added. “We are going into a much less harmonious world whatever happens.”

The pound traded choppily against the dollar, falling as much as 1.2 per cent before bouncing back to slip 0.5 per cent lower at $1.3225. The currency’s implied one-month volatility is about its highest since March’s market tumult.

Line chart of $ per £, showing that the pound fell as Brexit trade talks faltered

Piling the pressure on the pound and UK lenders were remarks made by Andrew Bailey, Bank of England governor, that it was undertaking “extensive work” on how to implement negative interest rates.

The prospect of another UK rate cut continued a rally in British government debt, sending the yield on UK 10-year sovereign bonds down 0.03 percentage points to 0.17 per cent. The move culminated in the best weekly performance for gilts since March.

Chart of 10-year UK government bonds, weekly % point change, showing that gilt yields are heading for their biggest weekly drop since March

The yield on comparable US bonds fell 0.02 percentage points to 0.89 per cent.

Brent crude dipped 0.5 per cent, but stayed above the $50-a-barrel mark crossed on Thursday for the first time since March, supported by progress on Covid-19 vaccines.

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