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Brexit and China tensions weigh on shares as pound gets hit

[December 07, 2020] By Danilo Masoni

MILAN (Reuters) - World shares fell on Monday as growing worries of a no-deal Brexit hit the pound hard and fresh Sino-U.S. tensions offset bets over more stimulus in Europe and the United States.

After surging to a fresh all-time high earlier on Monday, the MSCI world equity index, which tracks shares in 49 countries, dipped 0.2% by 1207 GMT.

The lack of progress in Brexit talks dented hopes that UK and EU negotiators would be able to strike a trade deal before a looming year-end deadline, depressing sentiment across markets.

The Brexit angst sent European shares down 0.3% but the top casualty was sterling, which fell over 1% in a sentiment reversal from Friday when the British currency rose to 19-month high against the dollar.

"We think a UK-EU trade deal narrowly remains the most likely outcome of talks, but time is not on anyone's side," said ING economist James Smith and strategist Petr Krpata in a note.

"A deal would unlock some modest upside for sterling, but a lack of risk premium means there is potential for plenty more downside should talks end without an agreement," they added.

Irish Prime Minister Micheal Martin said on Sunday the chances of a deal were 50-50, while bank JPMorgan said odds of a no-trade deal exit had risen to one third from 20%.

Brexit tensions were also felt across bond markets, while other risk-related assets also came under pressure.

Earlier, Asian shares fell, dragged by a Reuters report that Washington was preparing sanctions on Chinese officials over their alleged role in Beijing's disqualification of elected opposition legislators in Hong Kong.

In response to the report, China said it firmly opposed U.S. interference in its domestic affairs.

Meanwhile, futures for the U.S. stock benchmark S&P 500 slipped 0.3%.

Other potentially market moving events were also on the radar, starting with a EU summit from Thursday to break an impasse over a 1.8 trillion-euro coronavirus aid package, as well as the last ECB policy meeting of the year on the same day.

"To say that this week will be a crunch week with lots of high risk events with potentially binary outcomes is an understatement," said AFS Group analyst Arne Petimezas.

"While the week might be packed with high risk events, markets are so high on central bank liquidity and central bank puts that no one seems to really care," he added.

World shares had initially risen on Monday, building on recent weeks' rally on hopes of a faster global recovery as coronavirus vaccines get rolled out, starting this week in Britain.

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A man wearing a protective face mask walks past a screen displaying a graph showing recent Nikkei share average outside a brokerage, amid the coronavirus disease (COVID-19) outbreak, in Tokyo, Japan November 2, 2020. REUTERS/Issei Kato

On top of that, expectations of a U.S. stimulus aid package gathered pace after weak payrolls data on Friday and following a bipartisan proposal on a $900 million package last week that leaders on both sides appeared open to agreeing to.

But Brexit worries stood in the way to depress sentiment.

The pound hit a six-week lows versus the euro, and was last down 1.2% at 0.9131 after the Sun newspaper reported on Monday that Johnson was ready to pull out of Brexit talks "within hours" unless the EU changes its demands.

Against the dollar, it dropped 1.2% to $1.3265, while implied sterling volatility gauges for overnight and one-week maturities jumped to over 17% and 14% respectively as traders braced for more swings.

"A deal can still be done but with the probabilities near 50:50 it is little wonder that option demand seems biased towards downside strikes," said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

Elsewhere in currency markets, the U.S. dollar rose 0.2% to 91.01 against a basket of currencies, after hitting a 2-1/2-year low last week.

In bond markets, short-dated two-year Gilt yields reached a one-month low, while the yield on Germany's 10-year benchmark Bund dropped to a one week low of -0.587%, hit by Brexit tensions and also weighed by expectations the European Central Bank would announce further stimulus later this week.

In commodities, oil prices slipped from their highest levels since March as a continued surge in coronavirus cases globally forced a series of renewed lockdowns, including strict new measures in Southern California.

U.S. crude fell 1.2% to $45.72 per barrel and Brent was down 1.1% to $48.73. Brent has lost about a quarter of its value so far this year.

Gold eased, down 0.3% lower at $1,830.9 per ounce, as the dollar bounced off a multi-year low.

(Reporting by Danilo Masoni, additional reporting by Joice Alves in London and Swati Pandey in Sydney; Editing by Kirsten Donovan and Bernadette Baum)

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