UK stocks rallied on Tuesday as investors received their first chance to react to last week’s Brexit trade pact and the $900bn American stimulus bill signed into law by President Donald Trump at the weekend.

London’s FTSE 100 closed 1.6 per cent higher on the first trading day of the week following Monday’s public holiday.

“The unwrapping of the Brexit deal and a stimulus package for the US economy have propelled shares higher in Europe, with another boost of optimism, now foundations are being laid for a sustained recovery,” said Susannah Streeter, markets analyst at Hargreaves Lansdown.

That optimistic outlook continued early on Tuesday after the Democratic-controlled US House of Representatives passed a measure that would increase direct payments to Americans from $600 a person to $2,000. However, enthusiasm faded in the afternoon, after the Republican Senate majority leader Mitch McConnell blocked Democratic attempts to quickly adopt the higher payments.

Line chart of % change, indices rebased showing UK stocks rally after Brexit trade pact

The S&P 500 closed 0.2 per cent lower, while the tech-heavy Nasdaq Composite finished down 0.4 per cent.

The falls came after the S&P hit a new record high on Monday as investors cheered the injection of hundreds of billions of dollars into America’s pandemic-stricken economy.

Some investors pointed to profit-taking on Tuesday heading into the year-end driving some of the sell-off, especially in tech stocks that had been among the biggest winners over the past nine months.

“I think you are maybe seeing a little bit of pressure from those stocks that have already had phenomenal years,” said Peter Tchir, chief macro strategist at Academy Securities.

European stocks, which began the week on a high note, largely maintained their momentum.

The Europe-wide Stoxx 600 gained 0.8 per cent and France’s CAC 40 advanced 0.4 per cent. But Germany’s Dax, which hit a record high on Monday, lost 0.2 per cent.

Despite the late-year rally, UK markets have lagged significantly behind regional peers in 2020. The FTSE 100 has lost about 12 per cent this year, on a total return basis that includes dividends, FactSet data show. In the comparison, Germany’s Dax has returned 4 per cent in local currency terms, while the French CAC 40 has lost 5 per cent. Wall Street’s S&P 500 has delivered returns of almost 18 per cent.

In currencies, sterling ticked back up to around $1.35 on Tuesday after falling in the previous session. It failed to hit its highs for the year above $1.36, with investors indicating that the UK-EU trade deal was largely priced in and remaining cautious given the deal did not cover big industries such as financial services.

Markets in Asia also climbed, with MSCI’s gauge of equity markets in the region rising 1 per cent. Japan’s benchmark Topix added 1.7 per cent, while Hong Kong’s Hang Seng and Australia’s S&P/ASX 200 rose 1 per cent and 0.5 per cent, respectively.

In Hong Kong, shares in Chinese technology groups rebounded following concerns of a regulatory crackdown on the sector. Alibaba, the ecommerce group, jumped almost 6 per cent after falling 8 per cent a day earlier in the wake of a rare public rebuke by Chinese authorities targeting Ant Group, Alibaba’s payments-focused sister company, for alleged regulatory failings.

The moves by Beijing indicate a “turning tide in tech regulation, which we believe will be the industry’s biggest challenge in 2021”, said César Pérez Ruiz, chief investment officer at Pictet Wealth Management.

In commodities, oil continued to push higher on hopes that increased stimulus spending would boost the US economic recovery. Brent crude, the international benchmark, added 0.4 per cent to $51.06 a barrel. West Texas Intermediate, the US marker, gained 0.8 per cent to $47.99 a barrel.

The dollar, as measured against a basket of America’s trading peers, lost 0.4 per cent.