Brexit — remainers have their day but threaten long delay



Bethany Payne, Portfolio Manager, Global Bonds, summarises the latest developments in the parliamentary votes on the Brexit withdrawal agreement, the terms by which the UK will leave the European Union, looking at their potential meaning, future outcomes and impact on the markets.

Sterling made gains last night as parliament voted against a no deal Brexit in any circumstance. While ruling out ‘no-deal’ was expected, the instruction was stronger than the government's intention, to rule out a no-deal Brexit on 29 March only. Sterling drew comfort from the removal of the risk to a no-deal Brexit on 29 March but looks like it is yet to price in upside from either Theresa May's deal eventually being passed or from a softer Brexit.

Today the UK parliament will have to vote on whether there should be an extension to Article 50 (which sets the UK’s current exit from Europe at 29 March) — and it is highly likely to vote for a delay. While the government’s preferred extension is a short, time-limited delay to 30 June for the purpose of passing a deal and its necessary legislation, this is still only a request that the UK can make to the European Union (EU). Each member state of the EU needs to agree to the extension and they are unlikely to do so unless the UK’s parliament can demonstrate a consensus for a future relationship or a clear change in purpose for the extension. This will need to be done by Wednesday 20 March, in time for the European Council meeting on 21 March, where any Article 50 extension will be discussed.

This opens the way for a third attempt at passing the meaningful vote (MV3) on or before 20 March as well as possible indicative votes on alternative future relationships. The EU has made it clear, that the final offer before meaningful vote 2 (MV2), where the UK was given added legal assurances that the backstop would be temporary, was the UK's second and last chance of getting any further concessions from the EU, for Theresa May's deal.

The only way now for Theresa May to get more support for her deal is the threat of a longer extension and possible referendum. Intriguingly, the EU’s response to the request for an extension, whichever way it goes, might actually help her deal to be passed. If the EU does not offer an extension, it will be good for her deal as it will likely pass given the limited choices on the table. If it offers a long extension, it is also potentially good for the deal, making it more likely to pass given the complications of the UK having to participate in the European Parliamentary elections in May, as well as the fact that a long period could dilute the chances of Brexit happening at all. While this may be enough of a threat to get support from the Eurosceptic wing of the Conservative party, Theresa May still needs significantly more votes to change a 149 defeat (as suffered on Tuesday this week) into a victory. We do not therefore rule out a fourth attempt — MV4 — at passing a meaningful vote after the EU council meeting, if the defeat margin is narrowing.

In summary, there are clearly many more twists and turns to come. As for the markets, for now they will continue to be volatile, especially given the political uncertainty in the coming week. Ultimately however, the possible outcomes look more positive for the UK and those in favour of retaining a constructive future relationship with the EU, something that is yet to be priced in by the markets.

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