U.K. Markets Rally in First Full Trading Day After Brexit Deal
(Bloomberg) -- Investors poured into U.K. markets on the first full day of trading since a Brexit deal ended years of uncertainty weighing over the nation’s economic future.
The pound climbed, the FTSE 100 Index rose the most in nearly two months and long-dated sterling corporate bonds led peers on Tuesday. Investors are mostly casting aside concerns for now about the agreement, which won’t extend to the financial industry or the U.K.’s critical services sector.
It was the first market open for U.K. stocks and bonds since Britain and the European Union finalized their future trade relationship on Thursday, avoiding the risk of a chaotic divorce this week. Confidence across markets was also spurred by an agreement on U.S. stimulus.
“I would expect U.K. assets to outperform and the pound too, although the deficiencies of the deal are being highlighted by everyone,” said Mark Nash, head of fixed income alternatives at Jupiter Asset Management.
A trade deal avoided a worst-case scenario for the U.K. economy, which would have subjected it to World Trade Organization terms and knocked around 1.5% off gross domestic product next year, according to Bloomberg Economics.
The relief on Tuesday was palpable. The FTSE 100 Index climbed as much as 2.7% in London as the U.K. stock market reopened after the Christmas break, poised for its highest close in almost nine months.
The U.K. has been the worst performer among major equity markets since the 2016 Brexit referendum. For investors who have steered clear of the country’s shares, cheapness may appeal as value stocks are forecast to shine in the coming year.
“A trade deal gives us more confidence in our bullish view on U.K. equities,” UBS Group AG strategists led by Nick Nelson wrote in a note, forecasting the FTSE 100 will end 2021 at 7,200, or about 11% higher than its last close.
Outperformers included outsourcing firms such as Capita Plc and Babcock International Group Plc, landlords including British Land Co. Plc, and insurers Aviva Plc and Legal & General Group Plc. Travel shares also climbed, with TUI AG up as much as 11%, while lenders such as Lloyds Banking Group Plc lagged.
The pound briefly led peers to climb as much as 0.5% to $1.3523, before paring gains. While the currency has steadily clawed back ground in recent months, the recovery leaves it well off the $1.50 level seen before the Brexit vote. The country is still facing a spike in Covid-19 cases and a grim economic outlook.
Toronto-Dominion Bank remains in the “sell-the-rallies camp” and sees the currency declining toward $1.30, according to Ned Rumpeltin, its European head of foreign-exchange strategy.
Signs of caution are also flashing from the government bond market. Gilts rallied, sending two-year yields to a fresh record low and benchmark rates down by as much as five basis points.
“The market is not satisfied with the Brexit deal,” said Althea Spinozzi, a fixed-income strategist at Saxo Bank A/S. “We might see yields falling further because of a mixture of a not-so-great Brexit deal, a rise in coronavirus cases and the upcoming prolonged recession.”
Long-dated sterling notes also climbed the most in the European corporate bond market on Tuesday, boosted by the slump in gilt yields. A 2117-dated note by the University of Oxford and a 2052 issue by Southern Water saw the biggest price jumps among interest rate-sensitive long bonds.
Simon Harvey, a foreign-exchange analyst at Monex Europe, said markets are still trying to decide how to price U.K. assets.
“Having to do so with thin liquidity conditions means that it is like trying to hit a moving target,” he said. “I don’t think we will really see the true post-Brexit level until markets fully return on Jan. 4.”
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