Rotation trade unwinds on new Covid fears, Sterling gaps lower on lack of Brexit progress

• Pound gaps lower on lack of Brexit deal, border closures
• US Congress set to pass $900bn stimulus package
• Rotation trade reverses on new Covid fears

No Brexit deal, a new strain of the coronavirus, stricter lockdowns and the closure of key trade routes to the EU: Merry Christmas everyone. First up sterling and it’s been a very rough start to the Christmas week for the pound, as the lack of a Brexit deal and the closure of key freight routes to Europe knocked sentiment. Brexit talks continue today but key sticking points remain, whilst several European countries have blocked travel from the UK due to a mutant strain of the coronavirus rife in the southeast of England. GBPUSD gapped down from the 1.35 close on Friday to trade under 1.33 again but near-term support emerged at 1.32650. The pound remains on the hook for a severe downside shock if there is no deal by Christmas.

Worries about Brexit and the emergence of a more transmissible new strain which has led to tighter lockdowns unnerved investors as the start of the European session saw heavy selling in cyclical names and a broad 1-2% decline for the main bourses. British banks and others with the most exposure to the UK fell the most on the lack of a Brexit deal and the uncertainty over the UK economy, whilst travel stocks were whacked by the new restrictions on movement. A tougher lockdown in the southeast is also a nightmare for retailers, though those listed entities with a decent online platform will do much better than the family-run shops forced to close. The rotation trade unwound – Ocado and Fresnillo jumped while the likes of Lloyds and IAG fell sharply. Shell shares fell over 3% as it announced it would write down $3.5bn-$4.5bn in oil and gas assets next year, dragging BP lower by 5%.

This is the kind of near-term volatility we can expect until the full force of vaccines is felt. There has been a lot of hope already priced in with the vaccine-inspired November rally so we cannot expect a straight line higher for stocks. Unfortunately, tougher Tier 4 restrictions may be in place until the spring, so corrections of this nature are to be expected. The cavalry may be coming but the homesteaders need to batten down the hatches and face another onslaught before they arrive.

The risk-off tone emerged despite US Congressional leaders achieving a breakthrough on a Covid relief package. The $900bn, which lawmakers think has enough support to pass today, includes $600 stimulus cheques for every individual and enhanced unemployment benefits. US futures traded lower despite the news. Meanwhile, the FDA approved the use of Moderna’s vaccine in the US. Watch for US banks after the Fed said they could resume share buybacks.

Big falls for reopening stocks in the early part of the session.