The unexpected worrisome signals from the UK made the European stock markets retreat from record highs on Tuesday amid reports that Prime Minister Boris Johnson could introduce a legal provision to bar an extension of trade negotiations beyond a year. As such, concerns over a possible no-deal Brexit reemerged and hit investor sentiment. Also, market participants signal the growing need in fresh trade-related news after the US and China announced a partial trade deal to prevent another series of mutual tariffs. The deal, which is not yet signed, is set to be confirmed in the first week of January.
As for individual stocks, the Royal Bank of Scotland lost nearly 4% after Citi downgraded the lender to neutral from buy, citing the lack of further upside potential in stocks after a rally on the Tory victory late last week. Virgin Money shares were also downgraded by the investment bank and shed over 4% on the news. Meanwhile, Lloyds Banking Group led the losses in the banking sector, plunging by nearly 5% amid the talks about a possible need to increase its capital buffer based on stress-test results revealed by the Bank of England. Yesterday, the central bank announced plans to tweak its capital requirements for local banks to allow them to continue lending in the event of an economic crisis.
Against this backdrop, UK’s FTSE 100 sheds 0.22 per cent to 7503, Italy’s FTSE MIB adds 0.23 per cent to 23,591, France’s CAC 40 loses 0.43 per cent to 5,965, and German DAX 30 declines by 0.82 per cent to 13,297. U.S. stock index futures turned lower Tuesday morning along with European shares as risk sentiment globally started to ebb.
On the data front, the UK employment unexpectedly hit a new record high of 76.2% between August and October while unemployment stayed near record lows at 3.8%. The number of people in work rose by 24,000 over the quarter despite Brexit uncertainty. Positive numbers did little to ease the downside pressure on sterling as traders digest a strong message from the Prime Minister. Besides, CBI data showed that output volumes in the UK's manufacturing sector fell at its fastest pace in more than 10 years. All these factors coupled with stronger dollar pushed GBPUSD to Friday lows around 1.3150. Considering a souring demand for high-yielding assets, profit-taking could extend in the pair should the mentioned intermediate support give up in the short term.
In commodities, Brent crude extends gains but lacks the upside momentum to register fresh highs after a rejection from the $65.80 area on Friday. Still, the futures are holding close to the upper end of the extended trading range, with positive sentiment prevails in the market. But Brent may give up some of the recent gains should risk sentiment continue to deteriorate in the short term, or the upcoming API report point to increase in the US crude oil inventories.
Nathan Lambert, Head of Global FX Analytical Department