UK-exposed stocks like banks and house builders rallied on Monday morning, despite the failure to make progress on Brexit in parliament over the weekend.
Royal Bank of Scotland (RBS.L), which is solely UK focused, saw shares rally 2.1% at the open on Monday. Lloyds Bank (LLOY.L) shares were up 1.5%, Barclays (BARC.L) was up 1.4%, and Clydesdale & Yorkshire Bank (CYBG.L), which owns Virgin Money, rallied 0.9%. HSBC (HSBA.L), which has more of an international business and big exposure to Asia, was up 0.3%.
Banking stocks rallied as investors reasoned a hard Brexit was now less likely after the weekend’s events in parliament.
Boris Johnson withdrew a vote on his Brexit deal in parliament on Saturday after MPs outflanked the Prime Minister, forcing him to write to the EU asking for an extension to the timetable. Johnson has vowed to bring his deal back to parliament for a vote this week.
While the weekend’s events failed to bring clarity, a Brexit extension is preferable to a hard Brexit and analysts said Johnson may still be able to get his deal through parliament this week.
Michael Hewson, the chief markets analyst at CMC Markets, said in an email that the UK “will probably get a short [extension] if deal passed, a longer one if not.”
The “deal still looks like it may be passed and that means potential for further upside,” Hewson wrote to Yahoo Finance UK. “Market [are] taking the optimistic view.”
A hard Brexit is seen as damaging to the UK economy. Banks would likely face higher defaults on loans and mortgages in a hard Brexit scenario.
Ken Odeluga, market analyst at City Index, told Yahoo Finance UK: “Sentiment has shifted away from gloom about extended uncertainty. The reasons for that are increasing indications that Boris Johnson has sufficient numbers in the House to win a vote on his deal. This may prove incorrect, but it’s the prevailing view now.
“Hence, not just banks but also the pound and other domestically tied sectors are also rallying.”
Centrica (CNA.L), which owns British Gas, rose by 2.6%, house builder Taylor Wimpey’s (TW.L) stock price jumped by 2.7%, and Aviva (AV.L), the multi-national insurance company that makes around half its profit in the UK, was up by 2%.
The FTSE 100 (^FTSE) opened up 0.5% on Monday morning, boosted by banking stocks and the weak pound. Over half of earnings made by FTSE 100 companies are recorded in dollar, so a weak pound makes sterling-denominated share prices look more attractive.
However, the pound began to rally on Brexit hopes — hitting $1.30 for the first time since May — and this sent the FTSE 100 into reverse. The index was flat by 10.15am.
The FTSE 250 (^FTMC) initially opened in the red by was up by 0.1% in mid-morning trade. The FTSE 250 is made up of businesses largely focused on the UK and is seen as a more accurate barometer for investor faith in the British economy.