Paul O'Connor, Head of Janus Henderson's UK-based Multi-Asset Team, sifts through the highly complex range of Brexit scenarios following Theresa May's survival as party leader.
While Theresa May can now breathe a sigh of relief, knowing that she will not face another Conservative Party leadership challenge within the next year, she is unlikely to take much comfort from the developments of the past few days or the position in which she now finds herself. Surviving an attempted coup launched by one’s own colleagues can hardly be a cause for much celebration, particularly when more than one third of them voted for change.
On top of this, Theresa May will also know that the challenge of getting Parliament to pass her Brexit deal by the 21 January target date remains formidable. As things stand, she can only expect the support of the 200 MPs who voted for her last night, leaving more than twice that number opposing it. Today, she travels to a summit of European leaders in Brussels in the hope of amending the deal in a way that will broaden its appeal in the British Parliament. European leaders seem more likely to offer ‘assurances’ rather than the legally binding amendments sought by critics of the deal. It is far from obvious that the Prime Minister will gain enough concessions to significantly change the difficult parliamentary arithmetic facing her deal.
In broad terms, the vote has done little to reduce the uncertainty surrounding the Brexit process. Parliament still looks unlikely to support May’s proposal in its current form and it is far from clear what happens next if this proposal is rejected in the New Year. To simplify a highly complicated range of scenarios, we would focus on the following broad, potential outcomes:
Theresa May pivots towards a softer Brexit, making changes such as a commitment to permanent membership of a customs union – the Labour Party preference. The aim would be to garner cross-party support for the deal to overcome the split within the Conservative Party. The path to this outcome would involve substantial political turbulence and potentially a delay to the Brexit process.
Labour proposes a vote of no-confidence in the government, with a view to triggering a general election. If this was held today, Theresa May’s government would be likely to survive, but the margins are slim and the probabilities would change if the Prime Minister continues to lose political support in the months ahead.
Brexit postponed: If Parliament remains gridlocked, it is quite possible that a decision could be made to postpone Brexit, opening up the prospect of a second referendum or even the no-Brexit scenario. In our view, the European Court of Justice’s (ECJ) recent ruling that Britain can unilaterally revoke Article 50 significantly increased this scenario; one thing that Parliament seems to broadly agree on is avoiding a no-deal Brexit.
Last night’s vote has done little to clarify the direction in which the Brexit process is moving. While the range of potential outcomes remains wide and prediction is hazardous, markets are taking some comfort from the view that the possibility of a no-deal Brexit has probably been reduced by this week’s ECJ ruling. That goes some way to explaining why sterling has been more resilient this week than might have been expected given the continued chaos in UK politics.