Nervous investors hung on political developments in Europe and the US on Wednesday, as uncertainty over the UK’s ability to secure an eleventh-hour Brexit deal weakened sterling and the difficulty of agreeing fiscal stimulus in the US knocked stock markets.
Sterling sunk after nearing its strongest level of the year earlier in the day, giving up much of the day’s gains against the dollar to be up 0.3 per cent at $1.3401, having earlier risen almost 1 per cent to above $1.34.
Traders had hoped that UK prime minister Boris Johnson might thrash out a deal during Brexit talks in Brussels, but sentiment appeared to sour after EU heavyweights said they were prepared to accept a no-deal outcome.
“A lot of clients are not prepared for [a no-deal Brexit],” said Jean-François Robin, global head of research at Natixis. “Everybody is thinking that they’re going to do a late-hour deal.”
Paul O’Connor, head of multi-asset at Janus Henderson, said most people had been expecting a Brexit deal several weeks ago, but opinions had become “a little bit more mixed” in recent days.
Sterling was “the best single barometer” of investor confidence, he said, but noted that the pound had “churned around” in recent weeks, indicating traders did not have strong convictions about the outcome of the negotiations. Whether or not a deal is agreed, “the UK is heading for quite a difficult economic impact from Brexit”, he added.
Measures of expected volatility in the UK currency have ratcheted up markedly in recent days, with the end of the Brexit transition period just weeks away.
Mobeen Tahir, associate director of research at the fund house WisdomTree, said the pound was “responding with a lot of sensitivity to almost daily developments”.
In the US, wrangling over fresh fiscal support for the US economy continued after the Trump administration proposed a $916bn support bill to Democrats late on Tuesday.
Wall Street’s benchmark S&P 500 closed 0.8 per cent lower and the tech-heavy Nasdaq Composite dropped 1.9 per cent. The yield on 10-year Treasuries, which moves inversely to price, rose 0.02 percentage points to 0.93 per cent.
Antoine Bouvet, senior rates strategist at ING, said it was hard to gauge the odds of a fiscal deal emerging before the Biden administration was sworn in on January 20. Investors had all but written off the chances of an agreement being struck before the new year after Republicans and Democrats failed to sign off on a relief package before November’s presidential election.
“The market knows that some form of stimulus is coming, it’s just a matter of when and what form it may take,” said Frank Panayotou, managing director at UBS Private Wealth Management.
Data released on Wednesday showed Chinese consumer prices fell for the first time in more than a decade in November, slipping 0.5 per cent year on year, in a reading that was worse than forecasts by analysts polled by Reuters who predicted no change.
Chinese stocks slipped, with the CSI 300 closing down 1.3 per cent. Conversely, Japan’s Topix came close to its high of the year on optimism about the rollout of a Covid-19 vaccine.