Stock markets and pound set for fortnight of turmoil as Brexit deadlock and coronavirus wave threaten economy

  • The FTSE 100 is down by 13 per cent this year and on course to finish in the red
  • Even before the Tier 4 measures were announced, the Bank of England had warned that existing restrictions would weigh on the economic recovery 
  • If UK and EU negotiators fail to reach a breakthrough before the Brexit transition period ends on December 31, businesses face further disruption and costs 

By MATT OLIVER FOR THE DAILY MAIL

Updated:

Stock markets and the pound are set for a fortnight of turmoil as the Brexit deadlock and a fresh wave of Covid-19 threaten the economy. 

With just 11 days of 2020 left, the FTSE 100 is down by 13 per cent this year and on course to finish in the red. 

That is well behind the 17 per cent gain made by Wall Street's S&P 500 index, the 13 per cent rise by Japan's Nikkei and the 1.8 per cent gained by Germany's Dax – making the Footsie the worst-performing major index. 

Traders are braced for a nerve-wracking run-up to the New Year, with the notional deadline for a Brexit deal just days away and tough coronavirus restrictions effectively returning 20m people to lockdown. 

Even before the Tier 4 measures were announced, the Bank of England had warned that existing restrictions would weigh on the economic recovery – meaning the changes are likely to have an even more pronounced impact. 

Meanwhile, if UK and EU negotiators fail to reach a breakthrough before the Brexit transition period ends on December 31, businesses face further disruption and costs. Russ Mould, investment director at AJ Bell, said stock markets were now in for a jittery fortnight. 

Traders could be in for a particular shock if no Brexit deal is reached, he said, as many seem to have 'priced in' an agreement. 

One pound was worth about $1.35 on Friday. But Mould added: 'Stock markets, bond markets and currency markets are very much still torn between the pull of Covid and Brexit and the push from government support and central bank support, as well as the hope that a vaccine could get things back to normal soon. But now in December you are starting to see harsher lockdown measures across Europe and a Brexit deal going to the wire, so clearly you are going to see a lot of nerves. 

'Sterling has been going up and down like a fiddler's elbow with every political development on Brexit, but really traders have priced in a deal. If we see a No Deal outcome you could see it go down to $1.20.'

Researchers at Capital Economics have predicted that sterling could fall to as little as $1.15 in a No Deal scenario, triggering a rise in the consumer price index and hurting household spending power. 

Paul Dales, Capital's chief economist, added: 'Tariffs and customs checks at the borders will surely cause some economic disruption as trade moves more slowly across borders.' 

The uncertainly is likely to dampen hopes for a so-called Santa rally at the end of the year. By comparison, in the US, fresh hopes that a new economic stimulus deal could be reached by Congress is expected to buoy stocks. The tech-heavy Nasdaq composite has already risen 44 per cent this year.

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