Pound at two-month high on Brexit divorce deal hopes

UK’s 2-year gilt yield at highest level since Brexit vote, FTSE left out of stock rally

 “The news of a breakthrough in Brexit talks has profound political significance for sterling, a currency that is pricing in a lot of bad news,” says Viraj Patel, FX strategist at ING.

“We do foresee a ‘gentleman’s agreement’ over a transition deal as being a bigger positive catalyst for sterling down the road, but for now we hold the view that small steps forward are helpful for UK asset prices. We now have greater conviction over our year-end target of $1.36 for the pound.”

Hot topic

Hopes that the UK has reached an agreement on a divorce payment to the EU is prompting a brisk re-pricing of UK assets.

Sterling is back up to levels last seen in early September. The yield on 2-year gilts is up at its highest since the Brexit vote as investors sell the debt, crossing back above the UK’s base rate at 0.5 per cent.

The FTSE 100 is missing out on a wider rally for European stocks, as the rally in sterling takes a toll on foreign currency earners.

Such a breakthrough in the Brexit talks — which could cost up to €100bn — would free negotiators to address the terms of trade between Britain and the EU after its departure from the bloc.

The yield on the more policy-sensitive 2-year gilt is up 5 basis points at 0.518 per cent as traders sell the debt. That is the highest level since before the Brexit vote. The benchmark 10-year gilt yield is up 6.2 basis points at 1.32 per cent.

The pound is 0.6 per cent higher at $1.3420, taking its rally against the dollar since the news broke overnight to just over 1 per cent.

Over the year to date, the pound is up 8.8 per cent and the latest leg of its rebound cuts its decline since the Brexit vote to just under 10 per cent.

A wider trend for a weaker dollar flatters the rally somewhat. Against the euro, sterling is 0.4 per cent stronger, with £0.8838 required for a unit of the shared currency. That leaves the pound off the previous session’s strong point of £0.8844 per euro, a 12-session peak.

The action on currency markets is hitting UK stocks, with the FTSE 100 down 0.6 per cent, which is all the more notable as its peers rise. International companies benefit from a weaker pound, which makes their exports more competitive and flatters revenue earned in foreign currency when it is repatriated into sterling.

 

Equities

Wider European stock indices are rallying. The Europe-wide Stoxx 600 is up 0.6 per cent, with the Xetra Dax 30 up 0.9 per cent.

Asia equities are mostly higher following a strong lead from Wall Street, and largely shrugging off geopolitical tensions in the wake of an early morning North Korean missile test.

The Kospi Composite index in Seoul is off 0.1 per cent, while the Topix index in Tokyo is up 0.8 per cent.

Chinese stocks have once again been volatile, but the jitters in the market over a government crackdown on leverage levels are easing.

Hong Kong’s Hang Seng index is 0.1 per cent lower while the CSI 300 index, which tracks the largest companies listed in Shanghai and Shenzhen, is also down 0.1 per cent.

It follows a rally by US stocks on Tuesday, with several major benchmarks hitting fresh records on optimism about corporate tax cut prospects.

Commodities

Oil edged lower amid uncertainty over whether Saudi Arabia and Russia would agree to extend production curbs at an Opec meeting on Thursday.

Brent crude, the international benchmark, was down 0.7 per cent at $63.14 a barrel after slipping 0.4 per cent overnight. West Texas Intermediate shed 0.5 per cent to $57.68 a barrel as the US marker pulled further back from a recent rally.

Forex

The dollar index is slipping — down 0.2 per cent at 93.1209 — with investors continuing to wait for signs of progress on US tax reform, the prospect of which helped it off its September lows.

The yen is flat at 0.1 per cent to ¥111.46 per dollar after data showing consumer spending stagnated in October.

 

Source: FT.com