U.K. Markets Rally in First Full Trading Day Post-Brexit Deal

(Bloomberg) -- Investors poured into U.K. markets on the first full day of trading since a Brexit deal ended years of uncertainty weighing over the nation’s economic future.

The pound climbed, the FTSE 100 Index rose the most in over a month and long-dated sterling corporate bonds led peers on Tuesday. Confidence across markets was also spurred by an agreement on U.S. stimulus.

It’s the first market open for U.K. stocks and bonds since Britain and the European Union finalized their future trade relationship on Thursday, which avoided the risk of a chaotic divorce this week. Investors for now are casting aside concerns about the limited scope of the agreement.

“I would expect U.K. assets to outperform and the pound too, although the deficiencies of the deal are being highlighted by everyone,” said Mark Nash, head of fixed income alternatives at Jupiter Asset Management.

The FTSE 100 Index climbed 2.3% as of 10:30 a.m. in London as the U.K. stock market reopened after the Christmas break, poised for its highest close in almost nine months, while the more domestically-focused FTSE 250 Index was up 2.3%.

The U.K. has been the worst performer among major equity markets since the 2016 Brexit referendum. For investors who have steered clear of the country’s shares during the period, their cheapness may hold allure as value stocks are forecast to shine in the coming year.

“A trade deal gives us more confidence in our bullish view on U.K. equities,” UBS Group AG strategists led by Nick Nelson wrote in a note on Tuesday, forecasting the FTSE 100 will end 2021 at 7,200, or about 11% higher than its last close.

Leading the gains were outsourcing firms such as Capita Plc and Babcock International Group Plc, landlords including British Land Co. Plc, and insurers Aviva Plc and Legal & General Group Plc. Travel shares also outperformed, with TUI AG up as much as 11%, while lenders such as Lloyds Banking Group Plc lagged.

The pound briefly led peers to climb as much as 0.5% to $1.3523, before paring gains. U.K. government bonds also rallied, sending two-year yields to a fresh record low and benchmark rates down by five basis points. That reflects ongoing concerns about the U.K. economy.

Long-dated sterling notes also climbed the most in the European corporate bond market on Tuesday, boosted by the slump in gilt yields. A 2117-dated note by the University of Oxford and a 2052 issue by Southern Water saw the biggest price jumps among interest rate-sensitive long bonds.

Simon Harvey, a foreign-exchange analyst at Monex Europe, said markets are still trying to decide how to price U.K. assets.

“Having to do so with thin liquidity conditions means that it is like trying to hit a moving target,” he said. “I don’t think we will really see the true post-Brexit level until markets fully return on Jan. 4.”

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