In a surprise move this afternoon, Theresa May announced to parliament that Tuesday’s planned vote on her Brexit deal would be postponed. No. 10 had insisted up until 11:20am this morning that the vote would go ahead, despite rumours to the contrary. In her statement to parliament May said she would go back to the EU and ask for more assurances, including gaining additional power over the Irish backstop. However, at the same time she strongly defended her existing deal, and called on those opposing the deal to consider their objections given the lack of alternatives on offer.
The move was taken after it became apparent that around 100 MPs from May’s own party were planning on voting against the deal, in addition to all other parties, including the Democratic Unionist Party (DUP). This is a major blow to the Prime Minister as her hard won agreement with the EU has been rebuffed before it even saw the light of day.
Sterling has reacted negatively and is down by more than 1.5% versus the US dollar, reaching $1.253*, levels last seen in early 2017. Against the Euro, Sterling is down by 1.6%*. The FTSE 100 is slightly lower (around 0.5%*), with the negative sentiment offset by the support of sterling weakness. Yields on 10 year UK gilts are around 12 basis points lower, suggesting a move to safe haven assets.
At this stage there is still no sense of panic or euphoria in the markets. Developments from now on will be the key drivers of asset prices, and we will keep you appraised on any further updates.
What happens next?
Importantly, the decision today does not mean the UK is heading for a “no deal” hard Brexit. May’s plan is to now go back to the EU and seek further assurances, especially on the Irish backstop, in order to gain further parliamentary support for her deal. However, the EU is so far showing no signs of being willing to renegotiate. European Commission spokeswoman Mina Andreeva said We have an agreement on the table which was endorsed by the European Council in its Article 50 format on 25 November. As President Juncker said, this deal is the best and only deal possible. We will not renegotiate - our position has therefore not changed and as far as we are concerned the United Kingdom is leaving the European Union on 29 March, 2019.
If no new deal can be negotiated, a number of options are still on the table. In this context it is worth noting the other headline from Monday; namely that the ruling from the European Court of Justice that the UK is free to unilaterally revoke Article 50 and reverse Brexit without approval from the other EU states. Hence, much of the debate will focus on whether a second referendum is a viable option. Notably, the Labour party has seemingly softened its stance in recent weeks. However, this begs the question on what we will be voting on - the deal on the table, Brexit full stop, or even another kind of Brexit entirely, for example the kind favoured by Boris Johnson and Jacob Rees-Mogg. A second referendum could ultimately lead to Article 50 being withdrawn and Brexit being abolished.
May is also likely to face a leadership challenge if the 48 letters required for a vote of no confidence materialise as expected in the next few days. Furthermore, Dominic Grieve’s recent parliamentary amendment, which was tabled and passed last week, allows parliament to have a meaningful say on the outcome of Brexit in the event that May’s deal did not pass. This has taken much of the power out of May’s hands, even if she does survive the no confidence vote. A potential Norway style agreement is seen as the preferred option by some MPs, particularly some in the cabinet, i.e. “Norway for Now”, but this is seen as unsatisfactory by many due to the freedom of movement requirement that Norway has signed up to. Similarly, Corbyn is likely to do all in his power to push for a new general election. Whether he can muster enough cross party support to do so remains to be seen.
The ultimate deadline for Parliamentary agreement is 21 January 2019. If nothing is agreed by then the likelihood of a “no deal” hard Brexit increases at the end of Article 50 on the 29 March. However, continual headlines highlighting the risks involved, whether it be the supply of food and medicines, flights being grounded or lorry queues from Dover to London, surely mean that MPs will look to avoid this option at all costs. Clearly there is no majority in parliament in support of this option.
Expect daily news flow on Brexit and more announcements in due course both in terms of the deal itself but more importantly on the leadership of the country and/or another referendum vote, the so called “People’s Vote”. This news will be driving markets in the short term; bond, currencies and equities. We will keep you updated on any significant developments.
At times like this it is important that Brown Shipley portfolios remain well diversified, and we remain focused on the medium term and on economic and market fundamentals, rather than simply reacting to short-term headlines.
If you have any questions on your portfolio please contact your usual Brown Shipley adviser.
Chief Investment Officer
* Source Bloomberg