By Barbara Kollmeyer
Both stocks and the pound in London got hit on Friday, as investors nervously watched the clock tick down to a weekend deadline for the U.K. and European Union to work out a post-Brexit trade deal.
The FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX +1.68% fell 0.8% to 6,549.32, while the pound /zigman2/quotes/210561263/realtime/sampled GBPUSD -0.0575% slid 1% to $1.3163, a level not seen in roughly a month. Both U.K. Prime Minister Boris Johnson and European Commission President Ursula von der Leyen have said no deal was more likely ahead of their Sunday deadline.
Johnson on Thursday warned that “looking at where we are [he thought] it’s vital that everyone now gets ready for” the absence of a deal, a scenario he still calls the “Australian option,” though the EU doesn’t have a trade treaty with Australia.
“With precious little time left to strike a deal, Brexit negotiations are looking unlikely to yield anything positive. Banks have been in the firing line, with the prospect of further economic weakness overshadowing the fact that they appear to be well prepared,” said Joshua Mahony, senior market analyst at IG, in a note to clients.
Mahony said optimism over COVID-19 vaccines appeared to fade as investors looked to those Brexit talks and equally difficult discussions between U.S. lawmakers over securing another stimulus deal. Both countries are battling tough second waves of the COVID-19 pandemic.
Shares of GlaxoSmithKline /zigman2/quotes/200381158/delayed UK:GSK +0.56% /zigman2/quotes/209463850/composite GSK +0.75% fell 0.8%, after the U.K. drug company and French pharmaceutical group Sanofi /zigman2/quotes/206928357/delayed FR:SAN +1.12% /zigman2/quotes/201967021/composite SNY +0.32% announced the delay of their COVID-19 vaccine until near the end of 2021, after early trials showed an insufficient response in older patients .
The U.K. has made headlines in recent days for being the first western country to begin its vaccine rollout with the candidate from U.S. drug company Pfizer /zigman2/quotes/202877789/composite PFE +0.05% /zigman2/quotes/203243414/delayed UK:0Q1N 0.00% and its German partner BioNTech /zigman2/quotes/214419716/composite BNTX -3.45% . The U.S. Food and Drug Administration on Friday said it will finalize and issue an emergency use authorization for that experimental vaccine, a day after a federal advisory committee voted in favor of the regulator giving that approval.
Heavily-weighted banks dragged down the main London index, with shares of HSBC /zigman2/quotes/203901799/delayed UK:HSBA +2.99% /zigman2/quotes/208272822/composite HSBC +2.61% down more than 2%, and those for Lloyds Banking Group /zigman2/quotes/200709414/composite LYG +2.41% /zigman2/quotes/202285510/delayed UK:LLOY +2.63% and Barclays /zigman2/quotes/208409333/delayed UK:BARC +3.43% /zigman2/quotes/206581728/composite BCS +1.97% off by 6% each. That is even as the Bank of England’s latest stability report said U.K. banks are healthy, headed into what could be a turbulent few months ahead.
“Banks have had to set aside vast sums of money for bad debt provisions as a result of the pandemic and the economic shock of a no-deal [Brexit] situation could see a further spike in credit loss provisions,” said David Madden, market analyst at CMC Markets, in a note to clients.
Major oil companies, which are also geared toward economic recovery, also weighed on the index, with shares of Royal Dutch Shell /zigman2/quotes/206428183/delayed UK:RDSA +1.87% /zigman2/quotes/205095589/composite RDS.A +2.92% and BP /zigman2/quotes/202286639/delayed UK:BP +2.69% /zigman2/quotes/202286639/delayed UK:BP +2.69% off 2.6% and 3.7%, respectively.
Elsewhere, shares of Rolls-Royce /zigman2/quotes/203646520/delayed UK:RR +0.53% led the decliners with a 10% plunge, after the British aircraft-engine maker said it expects a bigger-than-expected cash outflow of £4.2 billion ($5.58 billion) for 2020, due to a slow recovery for air travel due to the pandemic.
“The lockdowns in Europe and a slower recovery have had an impact on 2020, which we’d hoped might have been avoided given the steady improvement in WB (wide-body engine) flight cycles, leading to worse free cash flow,” said Citi analysts Charles Armitage and Pavan Daswani, in a note to clients.