Europe close: Possibility of Brexit deal offsets Covid-19 gloom

EU and UK leaders agreed to keep talking beyond Sunday's UK-imposed deadline and the bloc's Brexit negotiator, Michel Barnier, reportedly told envoys in Brussels that "there might now be a narrow path to an agreement visible."

The news saw the STOXX 600 index gain 0.44% to 391.85, while the German Dax put on 0.83% taking it to 13,223.16 and the Ibex 35 was up 0.96% to 8,140.80.

Banks did especially well on Monday, with the Stoxx 600 sector gauge rising 1.55%.

Euro/dollar also gained on the back of the news out of Brussels, strengthening 0.34% to 1.2153.

"Markets have enjoyed a good end to the year, but things do look perhaps too rosy given the potential bumps in the road, exemplified by renewed lockdowns in Germany and the Netherlands," said IG chief market analyst Chris Beauchamp.

"But the pre-Christmas bounce is hard to fight, and only the most committed pessimists will be hoping for a big drop ahead of Christmas Day."

Nonetheless, senior EU diplomats reportedly told Reuters that Barnier remained "guarded" on the prospects for an agreement.

Dampening the mood as well, Germany announced that it would move to a hard lockdown from Wednesday and some market observers expected Italy and the Netherlands to follow suit.

In equity news, shares in Polish video game publisher CD Projekt slumped after its highly-anticipated title Cyberpunk 2077 was criticised for glitches and bugs in performance. The sci-fi role-playing game sold more than 8 m copies in pre-orders before launch.

On the upside, the latest Brexit news buoyed UK housebuilders and banks all gained on the Brexit news with Vistry, Taylor Wimpey, Persimmon, Barratt, Redrow, Lloyds, NatWest and Barclays all higher.

"British banks with high exposure to the UK economy and property market remain high beta Brexit stocks. Likewise, housebuilders popped 5% higher on Brexit deal hopes. These stocks are a leveraged bet on the UK economy, which in the near-term at least is going to be at the mercy of a Brexit trade deal and the vaccination programme," said Markets.com analyst Neil Wilson.