The Brexit blog


Esther M Baroudy
Portfolio Manager

Closer Than Ever to Brexit With a Deal

As Brexit with a deal gains momentum, what are the implications of the unfolding political drama in the UK for its financial markets?

 

Following recent Parliamentary manoeuvres, almost all paths point toward a near-term UK general election and, in most cases, toward Brexit with a Deal. Prime Minister Boris Johnson is clear he wishes to leave the European Union (EU) in line with the Withdrawal Agreement agreed with the EU Council on 17 October. On 22 October, MPs agreed with a thirty vote majority to allow the Withdrawal Agreement to be debated ahead of becoming law. However, they refused to sign up to the Programme Motion or timetable designed to achieve Brexit by 31 October.

The PM has put the Withdrawal Bill ‘on pause’ and is now waiting to see what sort of delay to Brexit the EU will consent to. The EU’s attitude is critical. The French want only a short ‘technical’ extension or even according to some reports, no extension at all, while the Irish and Donald Tusk, the President of the EU Council, are looking for a ‘flextension’, which would end on 31 January 2020.

A Short Extension

If there is a short extension and Parliament continues to debate the bill, then amendments to the legislation will almost certainly include:

  1. A second or confirmatory referendum from Remainers (the vote will be close but unlikely to pass).
  2. Customs union or softer Brexit from Labour (could pass but will not be accepted).
  3. A ‘Trapdoor’ amendment to stop the UK from leaving the EU without a trade deal on 31 December 2020 (could pass but will not be accepted).
  4. Wrecking amendments from the Democratic Unionist Party, which feels left out.

If the Customs Union or ‘Trapdoor’ amendments pass, expect the government to pull the Withdrawal Bill. They will say future trade relations with the EU come in the next phase of negotiations. The Conservatives would also want a General Election before agreeing to a second referendum.

Under the Fixed-Term Parliament Act, the next General Election is set for 5 May 2022. To bring the date forward, either two-thirds of MP are needed to vote for a General Election or the government needs to lose a no-confidence motion. The government is looking at all options which would trigger a general election. These include negotiating with the Labour Opposition to agree to an earlier vote or even a no-confidence vote in itself!

12 December is believed to be the most likely date for a near-term General Election.

Financial Markets

The government is cognizant of the damage uncertainty over Brexit is doing both to business and consumer sentiment and this explains the urgency to ‘get Brexit done’. Manufacturing is particularly weak with the supply chain to the EU coming under severe pressure. However, there are signs of renewed export growth and the consumer is holding firm.

Since the Brexit Deal was announced, the pound has climbed back to just under GBP 1.30 and is better against the Euro. We look to the pound to appreciate once a deal is in place, with the next level potentially at GBP 1.35. This is also providing the General Election produces a business-friendly government. The pound is also likely to remain at a discount to fair value until there is greater clarity on the future trade relationship with the EU.

Since the Brexit Deal was announced, the pound has climbed back to just under GBP 1.30 and is better against the Euro. We look to the pound to appreciate once a deal is in place, with the next level potentially at GBP 1.35. This is also providing the General Election produces a business-friendly government. The pound is also likely to remain at a discount to fair value until there is greater clarity on the future trade relationship with the EU.

Gilts, however, could be subjected to angst over a rise in public spending, although ultra-low bond yields world-wide are helping to serve as an anchor to the yield curve.

Equities are more likely to react to earnings and global developments although we would expect select, domestically focused names to outperform in the near term.

The author is grateful for the contributions made by Viki Farmaki, James Binny and Elliot Hentov to this blog.

Disclosures

The views expressed in this material are the views of Esther Baroudy and Viki Farmaki through the period ended 10/24/2019 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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