The FTSE 100 lagged behind its European peers as the pound rose the most in nearly two months after the UK and EU agreed to extend post-Brexit trade talks.
Elsewhere, stocks climbed strongly amid signs of progress in US stimulus talks, and as the country prepared to roll out the first coronavirus vaccines.
London’s main stock index was up 0.3 per cent to 6,568 points shortly after 1pm. The more domestically focused FTSE 250 had jumped 1.3 per cent.
Germany’s Dax was up 1.3 per cent, and France’s CAC 40 was 1.1 per cent higher. The pan-European Stoxx 600 had climbed 0.9 per cent amid optimism about Brexit, stimulus and vaccines.
The FTSE 100 was held back by the pound. Sterling jumped 1.4 per cent to $1.341. It also rose one per cent against the euro to €1.103. A higher pound weighs on the overseas earnings of FTSE constituents.
Sterling’s solid rise came after Prime Minister Boris Johnson and EU commission president Ursula von der Leyen pledged to “go the extra mile” and extend the deadline for trade talks.
The UK is currently in a Brexit transition period, where it is still part of the EU’s single market. But that ends on 31 December, and both sides are racing to try to thrash out a free-trade deal before then.
However, they remain far apart on state aid and fishing rights. Economists warn a no-deal Brexit could hit the UK economy by two per cent next year.
“This has been a hard fought negotiation and there’s still some big issues remaining but with neither side willing to walk away from the table, I truly believe final compromises are close,” said Craig Erlam of currency firm Oanda.
“The nerves have been creeping in the last couple of weeks, Thursday and Friday in particular. But the decision to continue beyond the latest deadline has given new hope and sterling is flying today.”
Stimulus and vaccine hopes lift US stocks
US stocks were set to open higher, according to futures prices. The optimism in the markets was largely due to signs of progress in stimulus talks.
A group of bipartisan lawmakers is preparing to propose a $908bn (£677bn) stimulus package, according to reports. However, there is no guarantee Congress will pass it.
The roll out of the first coronavirus vaccines was also lifting sentiment in the US. The first deliveries of the Pfizer/Biontech vaccine are set to arrive this morning.
However, investors remain wary that global economies face a challenging few months. London looked set to put into the strictest tier of the UK’s lockdown system, while Germany was preparing harsher measures.
“The optimism surrounding the vaccines could be offset by fears over further economic slowdown because of the still-buoyant coronavirus,” said Fawad Razaqzada, market analyst with Think Markets.
“New virus cases are still rising in the US, with New York stopping indoor dining. As a result, this may keep bullish exuberance to a limit.”