Markets falter as Brexit approaches its endgame

LONDON - 16 October 2019: European equities opened lower and sterling came off five-month highs on Wednesday as the European Union and Britain resumed talks in Brussels to avert a disorderly Brexit before an EU summit on Thursday and Friday.

Hopes of a breakthrough lifted markets on Tuesday, but investors turned more cautious stance after looking for a deal during the night that never came.

“Most of the good news that could have been anticipated has been priced in, and now there’s caution it seems on whether we get a deal today or not,” said Kallum Pickering, senior economist at Berenberg.

The pound was GBP=D3 down 0.5% against the dollar with investors trading volatility levels not seen since the 2016 June Brexit referendum.

The pound had strengthened by close to 5% over the past week as investors rushed to reprice the prospect of a last-minute Brexit deal before the Oct. 31 deadline.

The pan-European STOXX 600 retreated 0.3%. Britain's domestically focused midcaps .FTMC, a gauge of Brexit anxiety, fell 1%.

Earlier, shares rose in Asia. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.5%. MSCI’s gauge of stocks across the globe was flat.

“Even though we are most optimistic that a deal does happen, we don’t think the most likely outcome is that it happens by October 31, so you would be looking at some form of extension and potentially elections,” said, Andrew Sheets, chief cross asset strategist at Morgan Stanley.

Third-quarter earnings are expected to show an overall decline in earnings, which could also weigh on morale, Sheets said. Morgan Stanley had a below-consensus view on how companies would fare this quarter, he said.

Europe’s companies are struggling with uncertainties ranging from Brexit and the U.S.-China trade war to Germany’s manufacturing recession.

Companies listed on the STOXX 600 index are now expected to report a decline in third-quarter earnings of as much as 3.7%, worse than the 3% expected a week ago, according to I/B/E/S data from Refinitiv.