Friday 11 December 2020 7:14 am

Before the Bell: Preparations start for a no deal Brexit

It was another mixed session for European stocks yesterday, with the FTSE100 outperforming on the back of a slightly weaker pound, but it was notable that we saw heavy falls in UK banks and other stocks with a domestic focus on no deal Brexit concerns.

Brexit talks

With UK/EU trade talks extended to the weekend, both the EU and the UK have started to prepare the ground for a no deal outcome.

EU Commission President Ursula Von Der Leyen outlined a number of contingency plans, or mini deals, which included various measures to deal with aviation safety, air and road connectivity, as well as fisheries, in order to ensure no disruption on 1 January.

Prime Minister Boris Johnson also put the UK on notice for a no deal outcome, saying that he was sceptical about the prospect of an agreement.

Read more: Boris Johnson: ‘Strong possibility’ now of a no-deal Brexit

“The pound did come under pressure but overall, there still seems to be some optimism that pragmatism will prevail as the 31st December deadline gets closer, and the realisation slowly dawns of the potential economic damage that could ensue in the days after a no deal outcome. An outcome that in the current circumstances would simply heap economic pain on top of economic pain,” Michael Hewson, chief market analyst at CMC Markets UK, tells City A.M. this morning.

The EU summit will continue into today, while EU and UK negotiators will continue to talk until Sunday.

“It is doubtful that we’ll see any progress by then, and we will then be faced with the option to carry on talking, or call a halt and accept the prospect of a no deal, given the scale of the differences between the two sides. Ultimately the real deadline remains 31st December, so while officials talk of a Sunday deadline, the only date that really matters is 31st December. Everything else is just noise,” Hewson said.

Read more: It’s not about fish, it’s about control

US yesterday

US markets also had a mixed session with the Nasdaq outperforming while the Dow and S&P500 both finished in negative territory.

Yesterday’s weekly jobless claims numbers showed a surprise surge to 853k, well above expectations of 725k. It is raising the prospect that the US economy is now starting to see an acceleration in economic weakness, said Hewson, pointing out that as the lack of a new stimulus deal starts to act as an anchor around the ankle of the economic recovery since April. All the while US coronavirus cases have continued to rise.

“If this surprise jump in the jobless claim’s numbers, and rising virus cases doesn’t concentrate minds amongst US lawmakers on Capitol Hill, it’s difficult to imagine what will, as differences between Democrats and Republicans continue to delay an aid package,” Hewson noted.

“This procrastination continues to limit the upside of US stocks despite another successful IPO, this time Airbnb which closed 113% above its IPO price, following on from the successful launch of Doordash the day before. On a more positive note a US FDA panel granted emergency approval for the roll out of the Pfizer vaccine,” he added.

Read more: Stunning Airbnb market debut drives valuation past $100bn in biggest IPO open of 2020

Bank of England

Bank of England governor Andrew Bailey, who is scheduled to speak later this morning, as the central bank publishes its financial stability report, has already gone on the record as saying that a no trade deal Brexit would inflict more damage on the UK economy than the coronavirus pandemic, a message he is likely to repeat.

The Bank of England also announced the end of its ban on UK banks paying dividends yesterday, what Hewson calls “a curious decision if a no deal Brexit is just around the corner.”

“If a no deal is as damaging as Andrew Bailey says it could be, surely the Bank of England would have delayed any decision on this until next month?”

Read more: UK Banks OK to restart dividend payments, PRA says

“There still seems to be this naive belief, particularly on the EU side that a no deal outcome will be worse for the UK, if comments from Luxembourg Prime Minister Xavier Bettel are any guide, conveniently forgetting that the continent is already being ravaged by the very same pandemic, and that the UK has much more flexibility on both fiscal and monetary policy to absorb an economic shock, from such an outcome,” Hewson said.

Meanwhile, in Europe…

Yesterday’s action by the European Central Bank to expand its PEPP program by another €500bn and extend it to March 2022, while welcome, is already the equivalent of pushing on a string, and while the obstacles to the passing of the latest €1.8trn EU budget and stimulus package have been removed, the EU needs to do a lot more on the fiscal side to even get close to an effective response, Hewson noted.

The ECB decision didn’t appear to be unanimous with discussions around a 6 month or 12-month extension, before the consensus settled on 9 months. There were also some differing views on the economic outlook.

“The euro actually went up in the aftermath of yesterday’s decision, which suggests that markets think that the ECB will struggle to do much more, and with the Federal Reserve due to meet next week, and unlikely to talk the US dollar up, there is likely to be much more strong currency pain to come for the ECB,” Hewson concluded.

Read more: Paris experiences modest Brexit influx as thousands of professionals relocate