Shares in UK companies could not hold onto an initial surge on Thursday after Boris Johnson’s announced a "great" Brexit deal.
The prime minister’s last-minute Brexit agreement sent shares in British banks, retailers and property developers quickly shooting higher, before the wind was taken out of the market's sails as doubts were raised about the chances of the deal getting parliamentary support.
Sterling shot up 0.9% to a five-month high against the dollar at 1.297 before dropping back below 1.280.
A "great new deal" or "even worse" than before?
First to confirm the news was European Commission president Jean-Claude Juncker, who tweeted just after 10.30am that a "fair and balanced agreement for the EU and the UK" had been agreed.
A few hours later Johnson took to the same platform to call it a “great new deal”.
However, uncertainty continued to cloud the issue, as the UK can only leave the EU if the deal is voted through parliament, with the House of Commons holding a special debate for this purpose on Saturday.
Opposition leader Jeremy Corbyn called the deal “even worse” than that agreed by Johnson’s predecessor Theresa May, which parliament rejected three times.
Northern Ireland's Democratic Unionist Party, which has been propping up Johnson's and May's governments in Westminster, said the party's 10 MPs will not support Johnson's Brexit deal “as things stand”.
Under the terms of the new agreement, Northern Ireland will stay inside the UK’s customs territory and checks at the border will return.
With the government needing 320 votes to pass the deal in the Commons, the Conservative party has 288 MPs, of which around 283 are expected to back the new deal.
With the DUP withholding support, Paul Dales at Capital Economics said it was "plausible" that Parliament could pass the deal but "looks as though it will be close".
With up to five Brexit hardline ‘Spartans’ seen rejecting the deal, it was calculated said Johnson needs to find around 37 votes from outside his own ranks, of which nine Labour and independent MPs backed May's deal.
The opinions of the 21 Tory MPs kicked out of the party in the last two months, plus suspended MP Charlie Elphicke, are not all known but even if they all backed the deal, Johnson would still be six votes short.
"Johnson has a chance, but it is going to be tight," said Kallum Pickering at Berenberg. "A lot depends on how he sells the deal to the hardliners in the coming days."
Analysts at Deutsche Bank noted that the important point from the market's perspective is that avenues to a no deal Brexit have been "largely closed off" by the news.
Deutsche added: “The only prospect of a no deal Brexit in the next three to six months would arise if a general election resulted in the Brexit Party performing sufficiently strongly to be needed to support a Conservative minority government.”
Myron Jobson at Interactive Investor said that the short-lived market response was a "relief rally, both financial and psychological” after months of turmoil.
Initial gainers on the deal news included Barclays PLC (LON:BARC), Royal Bank of Scotland (LON:RBS) and Lloyds (LON:LLOY), which were all up 1% but outdone by challenger banks such as CYBG PLC (LON:CYBG) and OneSavings Bank PLC (LON:OSB) rising more than 3%.
Property names also surged, with the biggest riser on the Footsie initially being British Land PLC (LON:BLND), with Land Securities Group Plc (LON:LAND) not far behind, with supermarkets also market favourites, led by Morrisons’ PLC (LON:MRW).
Retailers were on the up as well, including grocers Tesco PLC (LON:TSCO), J Sainsbury PLC (LON:SBRY) and Wm Morrison Supermarkets PLC (LON:MRW) among the blue chips.