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Barclays and Lloyds soar on Brexit deal breakthrough! Here’s what I’d do now

The big banks have so many challenges that many investors have been shunning the sector altogether. Today, they are finally enjoying some good news and their share prices are absolutely flying as a result.

Let’shope it lasts.

Are we there yet?

The banks have been on a long, slow road to recovery after the financial crisis, and in many respects, they still aren’t there. They continue to incur endless regulatory penalties, the slowing global economy threatens a rise in bad loans, and falling interest rates are putting a fresh squeeze on net lending margins

At least there is now a whiff of a Brexit resolution, after Boris Johnson and Leo Varadkar made more progress than expected on Thursday. Today, Brexit Secretary Stephen Barclay met EU negotiator Michel Barnier, and now there is even talk of agreeing a deal by next week’s EU summit.

The Lloyds Banking Group (LSE:LLOY) is up almost 12% as a result, while fellow FTSE 100 banking giant Barclays (LSE: BARC) has soared almost 7%.

Hold on to your hats!

Events have moved at dizzying speed today, driving up the pound as well. Royal Bank of Scotland is up a dizzying 15% at the moment. 

We may not know much more for the next week or so, as talks will now enter the ‘tunnel phase’, where negotiators lock themselves away in total secrecy in a bid to thrash out a deal, line by line.

Markets may have got over-excited by the news. Today’s gains could retreat as euphoria slips and investors take profits. The news flow should ease once we enter the tunnel. You can expect another jump if negotiators emerge joyfully waving pieces of paper (and Parliament backs them), or kiss today’s gains (and more) goodbye if talks fail and we head for no-deal after all.

A positive resolution would be particularly good news for Lloyds, which is now primarily a domestic bank. It retail and small business customers are right in the firing line should we still get a no-deal departure. If there really is a wall of money waiting to be invested once Brexit is solved, then we might see a meaningful jump in consumer and business confidence, then GDP growth, and that could drive banking stocks even higher.

Barclays is more of a multinational bank, as it is also busy in the Asia Pacific, Americas, and Africa/Middle East. This gives it a much greater cushion against Brexit turmoil, which is why it hasn’t jumped quite as much today.

Take your time

Personally, I wouldn’t rush to buy these two stocks after today’s massive leap, but wait a few days for things to settle.

That said, both banks still look ridiculously cheap, with Barclays trading at 6.7 times forward earnings, and Lloyds at 7.0. Their dividends look hugely tempting, with Barclays forecast to yield 6% with cover of 2.3, and Lloyds on course to yield 6.4%, with cover of 2.2.

Let’s not get carried away, the Lloyds share price could still fall to 40p, but the future suddenly looks a lot brighter.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.