Sterling, euro stocks scuttled as Brexit deal slams the rocks

Oil nudges higher for second day after 12-day losing streak

LONDON (Reuters) – Sterling tumbled and the rest of Europe’s share markets groaned on Thursday after a long-awaited Brexit agreement was thrown into chaos as Britain’s chief negotiator for the deal quit just hours after it had been unveiled.

Up until that point markets had looked relatively calm. Asia had cheered news that China and the United States were back in contact about their trade dispute, and oil was inching up again having halted a record losing streak.

But then came the hammer blow with Brexit minister Dominic Raab quitting in protest of Prime Minister Theresa May’s deal for leaving the European Union.

“No democratic nation has ever signed up to be bound by such an extensive regime, imposed externally without any democratic control over the laws to be applied, nor the ability to decide to exit the arrangement,” he said in his resignation letter.

Cue a sterling meltdown. The currency slumped a full 2 cents to $1.2750 and though that made the FTSE stronger – a weaker pound makes life easier for exporters on the index – big UK banks and the rest of Europe sank swiftly into the red.

“The reaction in sterling shows that the chance of no Brexit deal has spiked,” said Tim Graf, head of Macro Strategy for EMEA at State Street Global Markets.

“It also introduces thoughts of a leadership challenge [for May], which seems likely now.”

The turmoil also boosted demand for safe-haven German government bonds. Ten-year yields on what is regarded as one of the safest assets in the world, fell over three basis points to 0.36% – its lowest in over two weeks.

UK government bonds saw a rush of demand too with the reflex dive for cover and the sight of state owned bank RBS stocks down almost 9%, drove the biggest fall in 5-year yields since just after the June 2016 Brexit vote.

EU leaders had said they would meet on November 25 to endorse the divorce deal, but May now faces the much more perilous struggle of getting parliament to approve what was agreed.

“We are basically trading the headlines,” said Ned Rumpeltin European Head of Currency Strategy at TD Securities in London. “I think a leadership challenge is imminent.”

Investors were also starting to look ahead to US trading where futures were pointing to a modestly higher start as forecast topping earnings from Walmart provided a welcome appetizer ahead of US retail sales later.

In the commodity markets, where Brexit may be a sideshow but turbulence is still acute after a 12-day losing streak was set this week, the mood was much calmer.

US oil futures steadied at $56.35 a barrel, after a slight bounce overnight. Brent was up 0.4% at $66.42.

MSCI’s broadest index of Asia-Pacific shares outside Japan had also ended up 0.8% having fallen the previous day as the sharp slide in oil prices had heightened anxiety about the global growth outlook.

Shanghai Composite Index gained 0.9%, while Hong Kong’s Hang Seng rose 0.8% on the China-US communications, while Australian stocks inched up 0.05% and Japan’s Nikkei shed 0.2%.