European stocks and sterling down as Brexit deal hits the rocks

London — Sterling tumbled and the rest of Europe’s share markets groaned on Thursday, after a long-awaited Brexit agreement was thrown into chaos as Britain’s chief negotiator for the deal quit just 12 hours after it had been unveiled.

Up until that point markets had looked relatively calm. Asia had cheered news that China and the US were back in contact about their bitter trade dispute and oil was holding steady again having snapped out of a record losing streak.

But then came the hammer blow. London’s Brexit minister Dominic Raab quit in protest at UK Prime Minister Theresa May’s deal for leaving the EU.

“No democratic nation has ever signed up to be bound by such an extensive regime, imposed externally without any democratic control over the laws to be applied, nor the ability to decide to exit the arrangement,” he said in his resignation letter.

Cue a sterling meltdown. The currency slumped a full cent to $1.2830 and though that made the FTSE stronger — a weaker pound makes life easier for exporters on the index — the rest of Europe sank swiftly into the red.

“The reaction in sterling shows that the chance of no Brexit deal has spiked,” said Tim Graf, head of macro-strategy for EMEA at State Street Global Markets. “It also introduces thoughts of a leadership challenge [for May] which seems likely now.”

The turmoil also boosted demand for safe-haven German government bonds. Ten-year yields on what is regarded as one of the safest assets in the world, fell over three basis points to 0.36% — its lowest in over two weeks.

EU leaders had said they would meet on November 25 to endorse the divorce deal, but May now faces the much more perilous struggle of getting parliament to approve what was agreed.

Oil simmers

In the commodity markets, where Brexit may be a sideshow but turbulence is still acute after a 12-day losing streak was set this week, the mood was much calmer. US oil futures steadied at $56.35 a barrel, after a slight bounce overnight. Brent was up 0.4% at $66.42.

MSCI’s broadest index of Asia-Pacific shares outside Japan had also ended up 0.8% having fallen the previous day as the sharp slide in oil prices heightened anxiety about the global growth outlook.

The Shanghai Composite Index gained 0.9%, while Hong Kong’s Hang Seng rose 0.8% on the China-US communications, while Australian stocks edged up 0.05% and Japan’s Nikkei shed 0.2%.

“While it’s difficult to pin-point a specific event for the risk-off move, recent themes that appear to be keeping markets cautious include oil’s recent plummet; Apple’s fall; US political gridlock; China’s slowing growth; tightening liquidity; a hawkish Fed; earnings peak; Italian jitters; and Brexit uncertainty,” wrote economists at ANZ.