Ball back in the UK’s court

Brexit has felt like a tennis match at times with the ongoing backwards and forwards with Brussels; and after Wednesday night’s developments, the ball is now firmly back in the UK’s court. The UK and EU agreed another Brexit delay, this time it’s both longer and with increased flexibility.

The key points agreed are:

  1. A Brexit extension for only as long as necessary and no longer than 31st October to allow for the ratification of the withdrawal agreement

  2. The UK must hold the elections to the European Parliament and if it fails to do this, the UK will leave on 1st June

  3. The UK can leave at any point if/when the withdrawal agreement is passed through parliament

  4. The European Council reiterates there can be no re-opening of the withdrawal agreement negotiations

Theresa May now has to work with her own party and others to get a majority in Parliament as to how the UK should leave the EU. It sounds a simple challenge, but the prime minister has failed three times already and anything Brexit related has proved to be far from straight forward. We have previously talked about the different scenarios that could unfold from here and recent talks between the Conservatives and the Labour party have seen the Customs Union 2.0 arrangement emerge as the early favourite; this is different to the current withdrawal agreement so would be need to be presented and ratified by the EU. A longer extension could result in various options being further explored in more detail, potentially resulting in another referendum (the so called “People Vote”), a General Election, or a version similar to Theresa May’s original deal. The latter seems more likely given the EU stressed again last night that the withdrawal agreement is not open to renegotiation.

Given Theresa May has already stated that she will step down as prime minister if her agreement is passed, this delay might also ramp up the speculation of a leadership contest in the Conservative party. The uncertainty around the leadership is also acting as a blocker in negotiations with Labour because any successor to Theresa May could renege on her agreement.

One thing remains abundantly clear and that is the continued opposition to the outcome that both the UK and the EU don’t want – a “No Deal”. This was agreed in Parliament, although only marginally by one vote last week, and the decision to delay shows that the EU also want to avoid a disorderly Brexit. This is not surprising given the multiple challenges Europe faces at the moment, whether economic or geopolitical. This highlights to other nations that leaving the EU isn’t an easy process.

How have markets reacted?

Currency and equity markets have been relatively calm in recent weeks despite the ongoing Brexit political developments. Sterling, the best barometer of ongoing negotiations, has been trading around the $1.30 mark. The FTSE 100 continues to be driven by a positive global equity market backdrop in 2019, notably through a turn in global monetary policy and progression on geopolitical risk.

Yesterday, whilst markets have taken some comfort from an extension, the moves were not material given this was highly expected. Below the overall market level, domestically focused stocks have bounced slightly; for example Banks and Housebuilders, but the moves are marginal. In the fixed income market, government bond yields have moved marginally higher and corporate bonds have performed slightly better on the news.

We maintain our longer-term and more global view

Recent market commentary has typically focussed on the short term “noise,” particularly driven by the day to day political developments on Brexit. At times like this we continue to concentrate our attention on the global backdrop and broader factors, other than Brexit, which are driving asset prices. Crucially, we are also not short-term investors and have a longer term investment outlook which avoids getting caught up in the daily noises from both politicians and jittery markets.

Alex Brandreth

Deputy Chief Investment Officer

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