Brexit and China tensions weigh on shares as pound gets hit

2/2 © Reuters. A man wearing a protective face mask walks past a screen displaying a graph showing recent Nikkei share average outside a brokerage, amid the coronavirus disease (COVID-19) outbreak, in Tokyo 2/2

By Danilo Masoni and Swati Pandey

MILAN/SYDNEY (Reuters) - World shares and other risk assets fell on Monday as growing risks of a no-deal Brexit that hit the pound hard and fresh Sino-U.S. tensions offset bets over more fiscal and central bank stimulus in Europe and the United States.

After surging to a fresh all-time high earlier on Monday, the MSCI world equity index, which tracks shares in 49 countries, turned lower to fall 0.3% by 0919 GMT.

European shares fell 0.6% in early trade following losses in Asia on a Reuters report that Washington was preparing sanctions on Chinese officials over their alleged role in Beijing's disqualification of elected opposition legislators in Hong Kong.

E-Mini futures for the S&P 500 slipped 0.5%.

The main source of angst in Europe was Brexit trade talks which hung in the balance as London and Brussels tried to bridge significant differences in a last-ditch attempt to avoid a disorderly exit by year end.

Other potentially market moving events were also eyed, starting with a EU summit from Thursday to break an impasse over a 1.8 trillion-euro Coronavirus aid package, as well as the last ECB policy meeting of the year on the same day.

"To say that this week will be a crunch week with lots of high risk events with potentially binary outcomes is an understatement," said AFS Group analyst Arne Petimezas.

"While the week might be packed with high risk events, markets are so high on central bank liquidity and central bank puts that no one seems to really care," he added.

World shares had initially risen on Monday on hopes of a faster global recovery as coronavirus vaccines get rolled out, starting this week in Britain.

Hopes the vaccines will help curb the pandemic, which has so far killed more than 1.5 million people globally, sent shares soaring in recent weeks.

On top of that, expectations of a U.S. stimulus aid package gathered pace after weak payrolls data on Friday, following months of deadlocked negotiations.

A bipartisan group of Democrats and Republicans proposed a compromise 900 million package that leaders on both sides appear open to agreeing to.

In currencies, the pound was under heavy pressure and risk currencies fell as the lack of progress in Brexit talks dented hopes that UK and EU negotiators will be able to strike a trade deal before a transition period ends later this month.

Sterling fell 1.2% versus the dollar to $1.3263 and was down around 1.1% versus the euro at 0.9121, while implied sterling volatility gauges for overnight and one-week maturities jumped to over 17% and 14% respectively as traders braced for more swings.

Irish Prime Minister Micheal Martin said on Sunday the chances of a deal were 50-50, while bank JPMorgan (NYSE:JPM) said odds of a no-trade deal exit had risen to one third from 20%.

"A deal can still be done but with the probabilities near 50:50 it is little wonder that option demand seems biased towards downside strikes," said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen will review the situation on Monday evening.

Meantime, the U.S. dollar rose 0.4% to 91.19 against a basket of currencies, after hitting a 2-1/2-year low last week.

Brexit tensions also lifted European bond prices, sending yields lower. The yield on Germany's 10-year Bund dropped to a one week low of -0.58%, also weighed down by expectations the ECB would announce further stimulus later this week.

In commodities, oil prices slipped from their highest levels since March as a continued surge in coronavirus cases globally forced a series of renewed lockdowns, including strict new measures in Southern California. [O/R]

U.S. crude fell 1.7% to $45.46 per barrel and Brent was down 1.5% to $48.49. Brent has lost about a quarter of its value so far this year.