Brexit: UK stocks at 10-month high as deal struck before Christmas

Britain and the EU have agreed a free trade deal. Now politicians must rubber stamp it. Merry Christmas!

At last, four-and-a-half years after the referendum, and after lastminute talks continued through the night, UK and EU negotiators have struck a post-Brexit trade deal at the eleventh hour.  

UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen have agreed how trade between the two regions should continue after the so-called transition period ends on 31 December. The deal avoids reverting to World Trade Organization, or WTO, rules, and the introduction of tariffs which would have increased costs for businesses.

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Not everyone will be happy with the deal, and it must be formally approved by both sides before it can come into force. Politicians have a week to meet the transition deadline, with retrospective ratification expected by the European Parliament early in the new year.

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Recent events at UK ports have perhaps sharpened the mind in both London and Brussels. A mutant strain of Covid-19 has caused chaos at British ports, leaving lorry drivers stranded as France blocked access to key trading routes.  

Now, at least, trade between Britain and the EU should be free of tariffs and quotas. However, the ‘free trade’ document is said to run to 2,000 pages, so expect detail to drip out over Christmas and up to New Year.

Market reaction 

Reaction on financial markets has been positive. Over the past few days, sterling, a solid indicator of how Brexit has progressed, has traded as high as $1.3625, its strongest levels versus the dollar since April 2018 (see chart below).

Source: TradingView. Past performance is not a guide to future performance

On stock markets, the FTSE 250 index – the best measure of UK stocks and sentiment towards them - has responded well over the past few days, as hopes improved that a deal could be reached.  

An end to uncertainty, and greater clarity around trading rules for years to come, should give company bosses confidence to invest in their businesses. Many have held back that investment for years, preferring not to deploy capital until the rules that govern our future relationship with Europe became clearer.

The FTSE 250, which traded as low as 19,426 on Monday 21 December, touched 20,546 on Christmas Eve for a gain of 5.7% in just a few days. Up 1.2% today, it stands at its highest level since late February (see chart below). The more globally exposed FTSE 100 index added 2.6%.

Source: SharePad. FTSE 250 index in black, FTSE 100 in red. Past performance is not a guide to future performance

As trading ended for the Christmas period, beginning again on Tuesday 29th, UK focussed stocks were in demand. 

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Housebuilders Redrow (LSE:RDW), Berkeley Group (LSE:BKG), Barratt Developments (LSE:BDEV) and Persimmon (LSE:PSN) have risen sharply. So too have the banks, with Lloyds Banking Group (LSE:LLOY) among the day’s big winners – up 4%.  

Elsewhere, WH Smith (LSE:SMWH) is sharply higher, and investors used the Brexit news as an excuse to load up on Games Workshop (LSE:GAW), one of 2020’s star stocks. How long before the £3.7 billion company makes the FTSE 100?

From all of us at interactive investor, we wish you all a very merry Christmas and a prosperous new year.