Brexit deal hysteria sparks dramatic gains for UK stocks

(Reuters) - London-listed companies with exposure to the domestic economy soared on Friday for their best day in nearly a decade as hopes that Britain can seal a Brexit deal triggered explosive gains and a major reversal of fortunes for the much-shunned UK market.

Traders looks at financial information on computer screens on the IG Index trading floor in London, Britain February 6, 2018. REUTERS/Simon Dawson/Files

Investors pounced on everything from banks like RBS RBS.L to housebuilders and retailers such as Kingfisher KGF.L, which owns DIY chain B&Q, after British Prime Minister Boris Johnson and his Irish counterpart, Leo Varadkar, said they had found "a pathway" to a possible Brexit deal.

The buying spree targeted some of the market’s most beaten-down stocks and those considered most vulnerable to a downturn in consumer spending if the country crashes out of the European Union without a deal.

The FTSE 250 .FTMC surged 4.2%, while the Dublin bourse .ISEQ, often considered a barometer of Brexit sentiment, jumped 3.7% to its highest since May.

For a graphic on ftse 250, click

The blue-chips .FTSE, however, added a modest 0.8% in comparison as a rally in sterling triggered by Ireland's optimism of Britain leaving the European Union in an orderly fashion hit the dollar-earning constituents of the index.

The JP Morgan index that follows UK-listed companies making their money at home .JPDEUKDM soared nearly 8% on its best day since the basket was created nearly three years ago.

Four of the so-called UK "big banks", namely RBS RBS.L, Lloyds LLOY.L, HSBC HSBA.L and Barclays BARC.L, together added roughly 12 billion pounds to their combined market cap with rises of between 2% and 12.3%.

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Housebuilders Persimmon PSN.L, Barratt BDEV.L, Berkeley BKGH.L and Taylor Wimpey TW.L, whose businesses are heavily reliant on the health of the UK economy, jumped between 8.8%-12%.

“This shows just how beaten down are the share prices and valuations of those companies which do the majority or all of their business in the UK”, AJ Bell Ivestment Director Russ Mould said.

“There is still a lot of work to be done. What today does show is the potential for the UK stock market to rally if there is a deal and it is accepted.”

After nearly three years of chaotic negotiations, signs that a divorce deal could finally be nailed down were enough to push London-listed companies with exposure to the domestic economy to a premium over the FTSE 100 .FTSE for the first time since Theresa May stepped down as Prime Minister.

The magnified gains for UK stocks come despite Johnson offering little details on the terms of a divorce deal, highlighting desperation among traders to cling to any signs of a positive development.

“The chances of a deal seem to have improved... but hurdles still remain. Time to thrash out the details of the deal are tight, and then there is the question of parliamentary approval,” UBS economist Dean A. Turner pointed out.

British lawmakers had defeated former PM May’s Brexit plans three times before she finally gave up and stepped down.

The broader sentiment was also upbeat after U.S. President Donald Trump stirred hopes of a trade agreement with China, calling the first day of talks “very good”.

“We’re enjoying a much more uplifting end to the week as traders see cause for optimism in the two painful negotiations that have gripped markets in recent years,” Oanda analyst Craig Erlam said.

For a graphic on FTSE 250 vs FTSE 100, click

The FTSE had confirmed a “Death Cross” pattern in the previous session as its 50-day moving average (DMA) crossed below the 200 DMA, a technical pattern usually seen as a warning that more losses are likely in the near term.

A notable blemish on the main index was a 4% drop in ad firm WPP WPP.L after French rival Publicis PUBP.PA cut its sales view for the second time.

Luxury brand Burberry BRBY.L, which advanced in the previous session on a positive read-across from LVMH LVMH.PA, slipped 2.1% after German rival Hugo Boss BOSSn.DE cut its annual forecast.

AIM-listed Dart Group DTG.L surged 17% after the owner of British airline and tour operator Jet2 raised its annual profit view and said it had seen stronger demand for some products since Thomas Cook collapsed.

Friday’s recovery helped the FTSE 100 notch its best weekly performance since late August, after it suffered its steepest weekly fall earlier this month due to escalating U.S.-China trade tensions and recession fears.

Reporting by Shashwat Awasthi and Muvija M in Bengaluru, Josephine Mason in London, additional reporting by Indranil Sarkar and Thyagaraju Adinarayan; Editing by Bernard Orr, Gareth Jones and Nick Macfie