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Lloyds and other banks surge on Brexit deal hopes

The chances of reaching a deal before 31 October are still fairly low, according to analysts

Lloyds Banking Group and other banks surge on Brexit deal hopes
Brexit worries have weighed heavily on the British banking sector ever since the EU referendum in 2016

Shares in the UK’s big banks rose significantly on Friday as it appeared major progress has been made on a potential Brexit deal.

Royal Bank of Scotland Group PLC (LON:RBS) was the strongest performer among the banks, rising 13% to around two-month highs around 220.6p by mid-afternoon, followed by Lloyds Banking Group PLC (LON:LLOY), up 12% to 59.14p, and a 7% gain for Barclays PLC (LON:BARC) to 159.5p.

Brexit worries have weighed heavily on the British banking sector ever since the EU referendum in 2016.

HSBC Holdings PLC (LON:HSBA) and Standard Chartered PLC (LON:STAN), which have a greater focus overseas, were both up around 1% at 606p and 653p respectively.

Pathways and tunnels

Boris Johnson and Leo Varadkar were pictured smiling to reporters overnight after discussing a “pathway to a deal” in “very positive and very promising” talks, expressing confidence in a 31 October exit and urging the EU to resume talks in Brussels.

Member states gave permission for the so-called intensive “tunnel negotiations” on Friday, following a “constructive” meeting between EU’s chief Brexit negotiator Michel Barnier and UK Brexit Secretary Stephen Barclay.

The EU holds onto its requests of avoiding a hard Irish border, protecting the Good Friday agreements and the integrity of the single market.

Brussels will now hold a meeting on Tuesday morning to discuss Article 50.

Despite the widespread optimism, analysts do not feel so confident: the UK is said to have proposed a “pared-down free trade agreement”, switching away from a fully formed withdrawal agreement and focusing on a more limited free trade deal.

Analysts sceptical

It may be a difficult path, as the European Commission has no formal mandate from the European Council to reopen the Withdrawal Agreement, and the Council decision granting an Article 50 extension stated explicitly that the agreement would not be reopened.

According to comment issued by investment bank JP Morgan before the “tunnel” negotiations were approved, the chances to have a new treaty to be ratified next week seem low, even if the Council speeded up the procedures.

“The treaty still then needs to be voted on by the EU Parliament and the legislation to give it effect being passed in the UK so that it can be ratified. Getting all that done by the end of the month will be very difficult.”

Even if successful, the treaty may still be blocked at Westminster if the proposed deal does not receive parliamentary approval on 19 October, forcing Johnson to ask for an extension.

Investment bank Morgan Stanley sees a 30% possibility of such deal being passed, with Democratic Unionist Party and a section of the Tories ousting it.

“We continue to see elections as the most plausible way to decide the way forward on Brexit and expect them to be held before Brexit. However, if a Johnson government were to switch to supporting a negotiable deal, then we would see a significantly reduced risk of a no-deal outcome after elections, since even a 'Leave' government would prefer an orderly exit to a no-deal outcome.”

Builders and retailers fly

Other sectors in the FTSE 100 regained momentum after the good news, with developers and retailers rising strongly months of Brexit depression.

Housebuilders Barratt Developments PLC (LON:BDEV) jumped 10.3% to 647.2p, Persimmon PLC climbed 9.2% to 2,253p and Berkeley Group Holdings PLC (LON:BKG) rose 7% to 4,295p.

Retailers Marks and Spencer Group PLC (LON:MKS) climbed 13.02% to 118.35p, Kingfisher plc (LON:KGF) grew 11.83% to 215.6p, Next PLC (LON:NXT) went up 8.37% to 6,450p.

The FTSE 250 index, which is more domestically focused than the FSTE 100, was surging too, up more than 3% to 19,866.63.

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