LONDON — With new a deadline of Sunday to decide on the future of Brexit trade talks, analysts closely following the negotiations say the chances of an agreement are quickly diminishing.
Mujtaba Rahman, managing director of Europe at Eurasia Group, said his team had reduced the probability of a deal from 60% to 55%.
"If there is progress, talks could continue after Sunday. But the prospects of a no deal neither side wants are rising. One U.K. source said there had been "zero progress" tonight. Behind the bravado and spin, we agree with the directionality of this sentiment and are therefore reducing our probability of a deal from 60% to 55%," Rahman said in a note overnight.
Talks between the UK's chief negotiator David Frost and his EU counterpart Michel Barnier will resume in Brussels Thursday. Key sticking points remain fishing rights and regulatory requirements, Raab noted Thursday, as well competition rules (the so-called "level playing field") and governance of any deal.
More pessimism was sounded Thursday morning when European Commission President Ursula von der Leyen tweeted that the EU would publish no-deal contingency measures on Thursday.
"Negotiations are still ongoing but the end of the transition is near. There is no guarantee that if & when an agreement is found it can enter into force on time. We have to be prepared including for not having a deal in place on 1 January. Today we present contingency measures."
If no deal is struck by Dec. 31, the U.K. will have to trade with the EU on World Trade Organization terms — which means import tariffs and higher costs of business for firms on both sides of the English Channel.
"Fundamentally, now, this is a dispute about the conditions the EU is setting to enter its market, and how the U.K. views these conditions. As it has very serious 'across economy' implications for the U.K., it's very unclear whether Johnson will be able to agree," Rahman said.
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The new date of Sunday came after three hours of talks between British Prime Minister Boris Johnson and von der Leyen on Wednesday evening failed to yield much progress.
Von der Leyen described the two sides as "far apart" while a Downing Street spokesman said the leaders held a "frank discussion" with both acknowledging "there were still major differences between the two sides."
They agreed that chief negotiators would "continue talks over the next few days and that a firm decision should be taken about the future of the talks by Sunday," the spokesman continued, adding that Johnson "is determined not to leave any route to a fair deal untested, but any agreement must respect the independence and sovereignty of the UK."
On Thursday morning, Foreign Secretary Dominic Raab reiterated there was scope to strike a trade deal but told the BBC that it was unlikely talks would continue beyond Sunday — although he could not rule it out.
JPMorgan economist Malcolm Barr noted that while such deadlines during the Brexit negotiation process had routinely come and gone, the odds of a deal had still weakened in the bank's view.
"Given the lack of progress yesterday, we are nudging the likelihood of deal versus no-deal down to 60-40% from the two-thirds/one-third split we had previously," he said in a note Thursday.
"It remains the case that negotiations could continue beyond Sunday with there still being time for a deal to be implemented on January 1st. But the need to make preparations for the regime shift of 'no deal' is pressing, and taking such actions alongside the talks increases the sense that the two sides would be 'going through the motions' rather than being committed to concluding a deal. Hence our sense is that, in the absence of significant progress toward an agreement by the end of the weekend, the odds of a deal will fall below 50%."
Unsurprisingly, European financial markets experienced a muted start to the trading session on Thursday given the parlous state of Brexit trade deal talks. The pan-European Stoxx 600 hovered around the flatline in early trade. Sterling fell against the dollar, to $1.3309, and was down 0.7% against the euro for the session, at 90.81 pence against the single currency.
Edward Park, chief investment officer at Brooks Macdonald, told CNBC that the "mood music" was becoming more pessimistic.
"I think Brexit is fascinating in terms of how that's playing out in the market at the moment. The mood music at the moment is definitely sounding worse than it sounded a few weeks ago, particularly given the new deadline; it could be a false deadline but it is a new deadline of Sunday."
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Nonetheless, Park said the consensus among investors "is that we will see a deal and people are keen to not be caught offside around that, that's why we're seeing a bit of resilience in the FTSE 250 today and sterling which is still above 1.10 against the euro." Sterling could jump "quite a bit higher if we see a trade deal," he said, but he cautioned "a trade deal is going to be a far cry from the current relationship."
Florence Barjou, CIO of Lyxor Asset Management, told CNBC that the underperformance of U.K. stocks this year (the FTSE 100 is down 12.5% year-to-date) was linked not only to the Brexit risk, but also the impact of the coronavirus pandemic.
There is hope that a Covid vaccination campaign that got underway earlier this week could help the country's economy recover faster than expected.
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"If we have a more positive issue (outcome) on those Brexit negotiations, combined with the fact that the U.K. is one of the first countries that has a (coronavirus) vaccine campaign, we could have a recovery."
"The only question we have is the impact of the pound, of the currency, because if we do have an agreement probably we will see some strengthening in the currency and we know that this tends to dampen the growth of the FTSE, of U.K. stocks."
Correction: This article has been updated to correct Edward Park's role at Brooks Macdonald to chief investment officer.