LONDON (Reuters) - Sterling swung around five-month highs on Wednesday and stocks in London cut their losses amid a blizzard of contradictory headlines about whether Britain and the European Union were on the verge of agreeing a Brexit deal.
In another volatile day of trading for UK assets, financial markets remained hostage to news as British Prime Minister Boris Johnson and EU negotiators raced against the clock to forge a withdrawal agreement before an EU summit on Thursday.
Negotiators were struggling to clinch an 11th-hour deal, raising the chances that Johnson will have to seek an extension of the Oct. 31 deadline for Britain’s exit from the bloc.
Sterling has surged some 5% since late last week, when London and Brussels restarted intense negotiations.
But on Wednesday sources in the bloc said the talks had hit a “standstill”.
Disagreements centre on a future trade deal and the rejection by Northern Ireland’s Democratic Unionist Party (DUP), which supports the ruling Conservative Party in the British parliament, of customs arrangements tentatively agreed by negotiators for the Irish border.
The DUP’s leader Arlene Foster dismissed an earlier report that her party had come round to an agreement.
“It looks like a deal is being worked on but everyone who works with the EU knows that these deals happen at the last minute,” said Kit Juckes, head of currency strategy at Societe Generale in London. “It seems more likely than not that we will need an extension.”
At 1540 GMT, sterling was up 0.5% at $1.2844, having earlier rallied to $1.2855, a new 5-month high, on optimism that the DUP was coming round to a deal.
Against the euro, the pound was 0.2% stronger on the day at 86.160 pence - but off five-month highs hit earlier.
Sterling trading volumes have surged in recent days. On Tuesday, investors bought and sold more pounds than on any single day since November 2018, according to Refinitiv data.
London-listed companies that make their cash at home, from housebuilders to banks, on Wednesday reversed some of the ground gained since last week.
These domestically focused stocks, some of the world’s most unloved shares in recent years, have seen their fortunes transform since Friday - JPMorgan’s domestic basket has outperformed London-listed exporter peers and the blue-chip FTSE 100.
Britain’s mid-cap stocks index FTSE 250 cut its losses from the morning and was last down marginally. Ireland’s main stocks index fell 0.5%.
“UK equities have started to look more interesting. We’ve been on the negative side for some time, (but) I wouldn’t be so pessimistic there any more because valuations have started to look more attractive. A lot of bad stuff is priced in,” said Legal & General Investment Management strategist Lars Kreckel.
“If the Brexit issue were to disappear or become less prominent, you could have some flows returning to UK equities.”
For a graphic on UK domestic vs exporter stocks, click here
Trading in sterling options suggested high volatility in the currency was likely one way or another.
British government bonds benefited from the renewed uncertainty, with 10-year yields broadly flat on the day at 0.706%.
With the spotlight on Brexit, September inflation data had little market impact. Britain’s inflation rate failed to rise as expected last month as petrol prices fell at the fastest rate in more than three years, a boost to consumers ahead of Brexit.
Reporting by Dhara Ranasinghe and Josephine Mason; Additional reporting by Thyagaraju Adinarayan; Writing by Tommy Wilkes; Editing by Alison Williams, Hugh Lawson and Alex Richardson