Revived Brexit hopes lift stocks and sterling

[December 14, 2020]  By Marc Jones

LONDON/SYDNEY (Reuters) -Stocks began the week with robust gains as investors gauged the chance of added U.S. fiscal and monetary stimulus, while the British pound rose as a last-gasp extension to Brexit talks dodged a difficult divorce.

Europe opened with stocks up 0.75% and the euro up on the dollar [.EU] after London and Brussels agreed on Sunday to "go the extra mile" to try to reach a trade agreement.

"We are going to give every chance to this agreement ... which is still possible," the European Union's Brexit negotiator, Michel Barnier, told journalists before updating envoys from the 27 EU countries on Monday.

"Two conditions aren't met yet. Free and fair competition ... and an agreement which guarantees reciprocal access to markets and waters. And it's on these points that we haven't found the right balance with the British. So we keep working."

Progress on coronavirus vaccines also cheered risk sentiment, with the first doses shipping across the United States as part of an effort to inoculate more than 100 million people by the end of March.

"The vaccine has and will likely continue to provide a tailwind to the market that is allowing investors to look beyond record case levels, hospitalisations, and deaths," analysts at JPMorgan said in a note.

E-Mini futures for the S&P 500 responded by rising 0.5%, while March Treasury bond futures slipped 4 ticks. EUROSTOXX 50 futures added 0.5% and FTSE futures 0.1%.

MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.1%, after a string of record highs last week.

Japan's Nikkei rose 0.3% as a survey showed the mood among Japanese businesses had improved in the December quarter.

Sterling was the day's big mover, gaining on both the euro and the dollar as what last week had appeared to be evaporating prospects of a Brexit agreement, came back to life.

Against the dollar, the pound rose 1.5% to $1.3382 from Friday's close of $1.3222. The euro slipped 0.9% versus the UK currency to 90.73 pence, off a three-month top of 92.29.

"Even in the face of amped up rhetoric, we continue to think a deal is the most plausible outcome," said AXA Group chief economist Gilles Moec.

At this stage, he said, failure would probably stem from either Brussels or London pushing the envelope a bit too far, too late to get an agreement done in time.

"From this point of view, the fact that no new deadline has been tagged on the latest round of talks is positive in our view."

That could see the euro climb to 96.00 pence, analysts at Goldman Sachs said in a note; a deal could send the pound rallying to 87.00 per euro.

A man wearing a protective face mask is reflected on a stock quotation board outside a brokerage, amid the coronavirus disease (COVID-19) outbreak, in Tokyo, Japan November 10, 2020. REUTERS/Issei Kato

FED AHEAD

The single currency has already been gaining against the U.S. dollar, which many analysts believe has entered a cyclical downtrend as the prospect of a vaccine-driven global economic recovery lessens the need for safe havens.

The euro was up 0.3% on Monday at $1.2150 and within striking distance of its recent 31-month top of $1.2177. The dollar index stood at 90.622, near its recent trough of 90.471.

An added hurdle for the dollar will be the Federal Reserve's policy meeting on Dec. 15-16. The market is assuming the central bank will merely refine its forward guidance on policy rather than buying more bonds or "twisting" its portfolio to add more longer-dated debt.

The Bank of England on Thursday and the Bank of Japan on Friday will close out the central banks meetings for 2020 this week. Before that, Wednesday sees the global flash PMIs and Tuesday sees China’s monthly data dump.

"The risk is then if the Fed does unveil a surprise twist at this meeting, then Treasuries could rally and the USD could fall," said Tapas Strickland, a director of economics at NAB.

An extra wrinkle is the chance of a U.S. deal on fiscal stimulus after a top Democrat hinted a compromise was possible to get an agreement past Republican objections.

Reuters reported a $908 billion relief plan will be split in two to win approval and could be introduced as early as Monday.

The talk of stimulus helped put a floor under gold, leaving it lower at $1,836 an ounce. Gold has gained more than 21% this year.

Oil prices rose on Monday; it has now rallied for six weeks straight as investors priced in a global recovery next year. [O/R]

U.S. crude rose 33 cents to $46.90 a barrel. Brent crude futures rose 39 cents to $50.36. Iron ore, which has surged 21% since the start of December, dropped over 2% though.

Analysts at Deutsche Bank said it was likely to be caused by a call from one of China’s leading mills group for authorities to investigate ore's rally after allegations of illegal activities.

(Reporting by Marc Jones, editing by Larry King)

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