European stocks drop on Boris Johnson’s new Brexit deadline

London — European stocks skidded off record highs and sterling dropped more than 1% on Thursday, as reports that Britain’s prime minister is ready to play rough in Brexit talks brought December’s cross-market rally to a halt.

US-China trade optimism and reassuring Chinese economic data had driven Asia and emerging market stocks to 18-month highs overnight, but green immediately turned red when London, Frankfurt and Paris opened.

Britain’s FTSE 100, which had seen its best day in nearly a year on Monday, dropped 0.2% on reports that Prime Minister Boris Johnson would use his control of parliament to stop any extension of the Brexit transition period beyond 2020.

The news knocked the domestically focused mid-cap index as much 1.7% lower, while the pound fell 1% to back below $1.32 and nearly 2% less than Thursday and Friday’s post-election highs of just more than $1.35.

A profit warning from consumer goods giant Unilever that sent its shares down nearly 6% also helped push the broader European Stoxx 600 down 0.6%.

“So much for pragmatism,” JPMorgan’s Malcolm Barr said, referring to the reports of Johnson’s hard-line Brexit stance. “We have put the risk of a no-deal end to the transition at 25%, a number we regard as uncomfortably high.”

The resurgence of uncertainty over Britain’s departure from the EU on January 31 and their future relationship meant Wall Street was expected to give back some ground when New York re-opens and put safety trades back in play.

Most 10-year European bond yields were about two basis points lower. UK and German 10-year yields dipped to 0.77% and -0.29% respectively, compared to 1.85% for US treasuries.

Britain’s political wrangling did not keep Asian stocks from joining a global rally overnight, however, as more US officials confirmed phase one of a trade deal with China was done, although the details remain unpublished.

The preliminary deal between Washington and Beijing reached last week will double US exports to China, White House adviser Larry Kudlow told Fox News on Monday. The US will also reduce some tariffs on Chinese goods under the agreement.

Shanghai, Hong Kong and Seoul all gained more than 1% and MSCI’s all-country index set a record high, putting its gains for 2019 at almost 23%, its best year in a decade and the fourth-best year ever.

“People are looking to close 2019 on a good note,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “I think that these are far more opportunistic than they are conviction trades, so they tend to be a little bit more prone to taking profits.”

Palladium

The Australian dollar was another currency under pressure after the minutes of this month’s Reserve Bank of Australia (RBA) central bank meeting suggested it might cut interest rates again when it next meets in February 2020.

The RBA has already cut three times since June, taking rates to a record low of 0.75%. “Members agreed it would be concerning if there were a deterioration in the outlook,” the bank’s December minutes showed.

Elsewhere, investors were staying broadly optimistic over the tentative US-China trade deal struck last week that fueled gains in emerging-market currencies and capped the yen and Swiss franc.

Oil was nearing three-month highs in anticipation of growing demand from the world’s biggest economies. Brent crude ticked up for a fourth day at $65.52 per barrel, while gold held just below $1,480 per ounce.

Palladium, which is widely used in catalytic converters for car and truck exhausts, remained the real focus, though, as it sped towards $2,000 an ounce for the first time.

Saxo Bank analyst Ole Hansen said, “Supply is tight in the palladium market and when you’re adding the speculation about a potential pick-up in demand due to recovery in the global economy, you have a perfect storm of bullish news continuing to keep it supported.” 

Reuters