* Imminent announcement expected on Brexit trade deal
* UK domestic stocks hit highest since Feb
* Investors wind down for Christmas break in bullish mood
* Graphic: 2020 asset performance tmsnrt.rs/2yaDPgn
* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh
LONDON, Dec 24 (Reuters) - Stocks rallied and the British pound gained on Thursday as Britain and the European Union closed in on a free-trade deal and investors wagered on a global economic recovery.
Britain and the European Union were hammering out the final details of a narrow trade deal on Thursday with an announcement expected imminently, adding to an optimistic mood in the final trading session before the Christmas break.
While a last-minute deal has long been expected, finally removing the possibility of a no-deal outcome 4-1/2 years after Britain voted to leave the trading bloc will come as a relief to markets.
The FTSE 100 rose 0.07% while the more domestically-focused British mid-cap FTSE 250 index hit its highest levels since February, and UK small caps a record high. The STOXX 50 added 0.17% while Germany’s DAX gained 1.26%.
The MSCI world equity index, which tracks shares in 49 countries, rose 0.16% after solid gains in Asia.
The Brexit deal adds to an end-of-year bullish mood in markets, where investors have looked beyond a spike in new COVID-19 cases globally and rising unemployment to the hope that vaccines and more fiscal spending will help spur an economic recovery in 2021.
High on record sums of central bank stimulus, investors have pushed stock markets to new peaks.
Mizuho analysts dubbed it the “mistletoe effect”, whereby anticipation of a trade accord meant that “despite being subject to the approval of PM Johnson and EU governments the outline deal was enough” to stoke a rally in markets.
Sterling added another 0.6% to $1.3586, close to its highest level in two years. Still, the pound’s 5% rally since early November means much of the Brexit relief has been priced in to the currency, analysts say.
The dollar edged 0.1% lower while the euro held above $1.22.
Wall Street ended mostly higher on Wednesday and futures pointed to a stronger open later on Thursday.
A raft of mixed U.S. economic data showed lower jobless claims and an uptick in new orders for durable goods, but also a pullback in consumer spending, falling personal income and fading sentiment as the holiday shopping season nears its end amid a resurgent pandemic.
Investors largely shrugged off comments by U.S. President Donald Trump that a nearly $900 billion stimulus bill, agreed upon after months of wrangling in Congress, was “a disgrace” that he might not sign.
“While the pandemic meant lost lives and lost jobs in 2020, a successful vaccine rollout during 2021 is set to be a game changer: governments will gradually lift mobility restrictions and societies will return to most pre-pandemic habits,” Candriam told clients.
“The swift recovery during the third quarter in the Western hemisphere and the ongoing expansion in Asia, where a second infection wave has mostly been avoided, serve as a template for the near future.”
Brent crude futures rose 37 cents to $51.57 a barrel, while U.S. West Texas Intermediate crude increased 34 cents to $48.46, buoyed by a drawdown in U.S. stockpiles and the potential Brexit trade deal.
Gold prices rose, with the spot price of the precious metal at $1,878, 0.3% higher on the day.
Additional reporting by Stanley White and John McCrank; Editing by Kirsten Donovan