Investors given a taste of how no-deal Brexit will hit markets

A deal may not be possible by the end of the transition period, and this spooked markets yesterday.

Brexit-weary investors got some respite today after Monday's rollercoaster session gave them a taste of what lies ahead if Britain and the EU fail to agree a trade deal.

Housebuilders and mortgage lenders, including Lloyds Banking Group (LSE:LLOY), fell by as much as 6% yesterday after markets were spooked by a no-deal outcome suddenly looming into view.

Most City analysts had been confident until this week that a deal would be done before the end of the year, based partly on the assumption that talks of this kind always go to the wire. 

Now they are less sure, and the chances look to be 50/50 at best, with much riding on the result of Boris Johnson's trip to Brussels later this week for last-ditch talks.

The prospect of this make-or-break showdown put a temporary pause on the Brexit trades driving currency and stock markets in recent days, with the pound only slightly down against the US dollar and the FTSE 100 index off by less than half a percent today.

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Sterling had fallen by as much as 1.6% against the US dollar at one point yesterday, leading to a big divergence in fortunes for the FTSE 100 index and domestic-focused FTSE 250.

Dollar earners in the top flight, including British American Tobacco (LSE:BATS) and Diageo (LSE:DGE), were sharply higher as sterling retreated from the nine-month high seen earlier in December.

Blue-chip stocks with the most to lose in the event of a no-deal outcome were down sharply yesterday, including Persimmon (LSE:PSN), Berkeley Group (LSE:BKG), Lloyds and NatWest (LSE:NWG), as UK investors worried about a tidal wave of red tape.

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The FTSE 250 closed down more than 1% yesterday after falls for stocks including buy-to-let lender Paragon Banking Group (LSE:PAG). The second-tier index was down another 0.3% today, having been trading above the 20,000 barrier for the first time since March, after vaccine breakthroughs encouraged investors to snap up Coronavirus-hit stocks, including Cineworld (LSE:CINE).

The gains meant across-the-board amid optimism for a sustained recovery in markets in 2021. Analysts at UBS recently predicted the FTSE 100 index will finish next year at 7,200 as international investors return to UK assets for the first time since the EU referendum.

While the UBS forecast is now shrouded in Brexit doubts, some investors may feel that whatever the outcome in Brussels this week there's finally a chance to move on from the uncertainty and embark on a new era for UK-focused stocks.

Investors will also be keen not to miss out on the earnings boost for stocks in a post-pandemic market rally. Stephen Innes, chief global markets strategist at Axi, said:

“Investors are adopting an all-too-familiar stance trying to weigh near-term Covid-19-related headwinds versus a better long-term vaccine and stimulus-related outlook.”

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.