LONDON (Reuters) - European stocks skidded off record highs and sterling dropped more than 1% on Thursday, as reports that Britain’s prime minister was ready to play rough in Brexit talks brought December’s cross-market rally to a halt.

U.S.-China trade optimism and reassuring Chinese economic data had driven Asia and emerging market stocks to 18-month highs overnight, but green immediately turned red when London, Frankfurt and Paris opened. [.EU]

Britain's FTSE 100 .FTSE, which had seen its best day in nearly a year on Monday, dropped 0.2% on reports that Prime Minister Boris Johnson would use his control of parliament to stop any extension of the Brexit transition period beyond 2020.

The news knocked the domestically focused mid-cap index .FTMC as much 1.7% lower, while the pound GBP=D3 fell 1% to back below $1.32 and nearly 2% under Thursday and Friday's post-election highs of just over $1.35. [/FRX]

A profit warning from consumer goods giant Unilever (ULVR.L) that sent its shares down nearly 6% also helped push the broader European STOXX 600 down 0.6%. [.EU]

“So much for pragmatism,” J.P. Morgan’s Malcolm Barr said, referring to the reports of Johnson’s hard-line Brexit stance. “We have put the risk of a no-deal end to the transition at 25%, a number we regard as uncomfortably high.”

The resurgence of uncertainty over Britain’s departure from the European Union on Jan. 31 and their future relationship meant Wall Street was expected to give back some ground when New York reopens and put safety trades back in play.

Most 10-year European bond yields were around two basis points lower. UK GB10YT=RR and German 10-year yields DE10YT=RR dipped to 0.77% and -0.29% respectively, compared to 1.85% for U.S. Treasuries. [GVD/EUR]

Britain’s political wrangling had not kept Asian stocks from joining a global rally overnight, however, as more U.S. officials confirmed phase one of a trade deal with China was done, although the details remain unpublished.

The preliminary deal between Washington and Beijing reached last week will double U.S. exports to China, White House adviser Larry Kudlow told Fox News on Monday. The United States will also reduce some tariffs on Chinese goods under the agreement.

Shanghai, Hong Kong and Seoul all gained more than 1% and MSCI’s all-country index .MIWD00000PUS set a record high, putting its gains for 2019 at almost 23%, its best year in a decade and the fourth-best year ever.

“People are looking to close the year on a good note,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “I think that these are far more opportunistic than they are conviction trades, so they tend to be a little bit more prone to taking profits.”

(GRAPHIC: Global markets in 2019 - here)

PALLADIUM

The Australian dollar AUD=D3 was another currency under pressure after the minutes of this month's RBA central bank meeting suggested it might cut interest rates again when it next meets in February.

The Reserve Bank of Australia has already cut three times since June, taking rates to a record low of 0.75%. “Members agreed it would be concerning if there were a deterioration in the outlook,” the bank’s December minutes showed.

Elsewhere, investors were staying broadly optimistic over the tentative U.S.-Sino trade deal struck last week which fueled gains in emerging market currencies and capped the Japanese yen JPY= and Swiss franc CHF=.

Oil was nearing three-month highs in anticipation of growing demand from the world’s biggest economies. Brent crude LCOc1 ticked up for a fourth day at $65.52 per barrel, while gold XAU= held just below $1,480 per ounce. [O/R][GOL/]

Palladium, which is widely used in catalytic converters for car and truck exhausts, remained the real focus, though, as it sped towards $2,000 an ounce for the first time.

“Supply is tight in the palladium market and when you’re adding the speculation about a potential pick-up in demand due to recovery in the global economy, you have a perfect storm of bullish news continuing to keep it supported,” Saxo Bank analyst Ole Hansen said.