The pound traded choppily against the dollar, falling as much as 1.2% before bouncing back to slip 0.5% lower at $1.3225 © Bloomberg

Global stocks fell on Friday after strong warnings from EU and UK leaders that Britain could leave Europe without a trade deal, with London-based bank shares bearing the brunt of the selling.

London’s FTSE 100 and the region-wide Stoxx 600 indices both closed down 0.8 per cent after Ursula von der Leyen, European Commission president, told EU leaders that a no-deal Brexit outcome was the most probable scenario from make-or-break trade talks this week.

UK prime minister Boris Johnson issued a similar warning on Thursday evening, then said on Friday that Britain required a “big offer, a big change” from the EU after differences on competition law and fishing rights remained unresolved.

The political tumult in Europe combined with a record number of coronavirus cases in the US also weighed on Wall Street. The large-cap S&P 500 index ended the day down 0.1 per cent and the tech-heavy Nasdaq Composite closed 0.2 per cent lower, both trimming losses as the Senate passed legislation to prevent a government shutdown for one week.

Airbnb turned negative toward the end of trading to drop 4 per cent, while DoorDash shed almost 6 per cent after their blockbuster initial public offerings earlier this week, as both technology unicorns remained well above their listing prices.

“A lot of exciting and disruptive companies have come public this year and we believe that trend will continue into the first half of 2021,” said Jeff James, lead portfolio manager at Driehaus Capital Management.

So far this year, 203 IPOs raised $75bn, marking the biggest year since 2014 both for proceeds and deal count, according to Renaissance Capital, a provider of exchange traded funds that invest in IPOs,

Meanwhile, investors are wondering whether the “everything rally” is taking valuations to dangerous levels. “The market is expensive” but the acceleration of the digital revolution, an abundance of liquidity in the market and low interest rates are supporting valuation and keeping the IPO market wide open, said Anik Sen, global head of equity at PineBridge Investments.

Line chart of Against the US dollar ($ per £) showing Pound falls as Brexit trade talks falter

Turning back to Europe, “the market is beginning to finally price the real risk of a no-deal Brexit”, said Ben Laidler, chief executive of Tower Hudson Research. He forecast that the talks would slip past their Sunday deadline and produce a slimmed-down deal that provided a minor improvement to World Trade Organization terms.

“Amid year-end investor fatigue, there is some de-risking ahead of this weekend as a Brexit deal hangs in the balance,” said Emmanuel Cao, head of European equity strategy at Barclays, who added that “investors were mostly positioned for a deal”.

The FTSE 350 sub-index of bank shares fell 2.1 per cent with domestically focused lenders suffering the most. NatWest lost 6.7 per cent of its value while Lloyds Banking Group dropped 4.5 per cent. Financial shares were also the worst performers on the Stoxx 600.

Column chart of % change showing NatWest shares heading for their worst week since June

The pound traded choppily against the dollar, falling as much as 1.2 per cent before bouncing back to slip 0.5 per cent lower at $1.3225. The currency’s implied one-month volatility is about its highest since March’s market tumult.

Piling the pressure on the pound and UK lenders were remarks made by Andrew Bailey, Bank of England governor, that it was undertaking “extensive work” on how to implement negative interest rates.

The prospect of another UK rate cut continued a rally in British government debt, sending the yield on UK 10-year sovereign bonds down 0.03 percentage points to 0.17 per cent. The move sealed the best weekly performance for gilts since March.

Chart of 10-year UK government bonds, weekly % point change, showing that gilt yields are heading for their biggest weekly drop since March

The yield on the 10-year US Treasury note fell 0.02 percentage points to 0.89 per cent.

Brent crude dipped 0.5 per cent, at the $50-a-barrel mark it crossed on Thursday for the first time since March, supported by progress on Covid-19 vaccines.

Get alerts on Equities when a new story is published

Copyright The Financial Times Limited 2021. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article