Brexit talks fears weigh on sterling

The UK’s FTSE 100 index lifted from a two-month low yesterday as Brexit negotiations dented sterling, while Costa coffee shop owner Whitbread got a late boost when activist investor Sachem Head declared a stake in the company.

The index rose 0.5%, outperforming a negative European market thanks to a weaker sterling, which was down 0.4%.

Whitbread was a late riser to the top of the FTSE, shooting up 7.8% after US activist investor Sachem Head revealed a stake in the Costa coffee owner.

Shares in HSBC, Lloyds, and Barclays fell back as enthusiasm over US tax reform, which had boosted lenders in the past week, dissipated.

Jitters in technology shares drove Micro Focus and WorldPay down.

Investors’ eyes were glued to developments in fraught Brexit negotiations which have caused swings in sterling.

“Whether or not there is ‘sufficient progress’ on Brexit divorce talks by the EU Council Summit on 14-15 December is key to our economic outlook,” said Bank of America Merrill Lynch strategists in a note.

Taoiseach Leo Varadkar said negotiations over how Brexit would change the border arrangements could pick up again in the new year if a deal was not made this week. British press reports that no such deal would be reached sent sterling lower.

Market bets on sterling had shifted considerably in recent weeks towards betting on a breakthrough in Brexit negotiations, with sterling rising to more than a two-month high last Friday.

Though the tentative deal was rejected on Monday, some market strategists such as Nomura believe there is a 70% probability of a breakthrough in talks, though some traders say the latest headlines reduce those expectations even further.

“This political ping-pong battle is really hurting investor sentiment towards sterling,” said Neil Jones, Mizuho’s head of currency sales for hedge funds in London. Against the euro, sterling was down 0.2% at 88.11p.

Meanwhile, British manufacturers called for their government and the EU to reach a Brexit transition deal before Christmas, or else risk damaging uncertainty in 2018.

“Companies in the UK and across the EU want to see a transition or implementation deal nailed down this side of Christmas,” Stephen Phipson, chief executive of Britain’s EEF manufacturing trade association, said.

“An opportunity to do so is in clear sight and political leaders across the spectrum must put the economic interests of the country front and centre,” said Phipson.

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