UK stocks surge, yet Brexit and Tier 5 fears remain

A breakthrough in both Brexit and US stimulus talks have helped drive risk-on sentiment. However, with those gains fading for both US and European markets, the question is whether we can see that optimism sustained in the face of elevated Covid cases.

• UK stocks lead the way 
• US stimulus could be just the beginning 
• Brexit and Covid uncertainty hold back the pound for now

UK stocks are leading the way higher today, with Sundays US breakthrough on the stimulus front reflected throughout global risk-attitudes. The short-term benefits we have seen for global stocks are a reflection of the goldilocks scenario of breakthroughs in both Brexit and US stimulus negotiations. Nevertheless, the indecision seen in US markets today highlights the somewhat mixed outlook beyond the initial boost. With elevated Coronavirus cases around the world restricting economic activity, traders do have a largely depressing Q4 earnings season to look forward to. However, the 2021 recovery pathway will be influenced greatly by the rate of vaccinations, with EU forecasts likely to be hit if rumours of a delayed February approval of the AstraZeneca drug are true. From a market perspective, the US provides an area of potential hope for further stimulus. In the short-term, markets will be focused on the potential for a enhanced $2000 per person direct payment if approved in the Republican-controlled Senate. However, should the $2000 payout fail to get the votes this time around, there is hope that the numbers would improve once Joe Biden comes into office next month. The upcoming Georgia Senate runoff will determine what type of Biden Presidency we will get, with an unlikely double Democrat victory providing expectations of a ramp-up in government spending. Nevertheless, while Biden is likely to face a split Congress, this would likely mean a normalisation of global trade ties without the more extreme ends of Biden’s policy mix. 

The pound has been held back through a mix of soaring covid cases and fear of a bumpy Brexit road ahead. While nations prepare for a year of sharp growth, there is more uncertainty for the UK given the simultaneous exit from the EU. Hospitals are becoming increasingly stretched by the covid surge seen over recent weeks. With Christmas celebrations likely to see another flare-up in cases this week, there is a feeling that we could soon enough see Tier 5 restrictions put into place in a bid to arrest the current spread.