LONDON (Reuters) - Morgan Stanley (NYSE:MS) said on Friday that it expects the FTSE 250 index to drop 6% to 10% if Britain fails to agree a trade deal with the European Union before the end of a transition period.
Prime Minister Boris Johnson said on Thursday that there was "a strong possibility" Britain and the EU would fail to secure an agreement.
Morgan Stanley sees shares of UK banks falling 10% to 20% in a "no deal" scenario, given there is a higher chance the Bank of England would cut interest rates into negative territory.
The U.S. investment bank said insurance, real estate and housebuilding stocks were also at risk.
"A no-deal Brexit outcome would represent an unexpected surprise to markets, however the negative impact would be cushioned by an otherwise positive global outlook," the bank's equity strategists, led by Graham (NYSE:GHM) Secker, said in a note.
Investment banks have been cutting the chances of a UK-EU trade deal in recent days while bookmakers slashed the odds to 40% after leaders failed to break an impasse in talks.
A similar trend was seen in betting markets with odds of Britain failing to agree a deal rising to 61% on Friday, up from 53% the day before, according to punters betting on the Smarkets exchange.
Morgan Stanley sees the euro climbing to 0.95, a 4% rise from current levels, against the pound under a no-deal scenario. Sterling slipped 0.5% against the U.S. dollar and UK banking stocks dropped 3%-4% on Friday morning on Brexit jitters.
For graphic of UK stocks since Brexit vote: https://fingfx.thomsonreuters.com/gfx/buzz/qzjvqdeggpx/Pasted%20image%201607680042445.png