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Click here for part II
Theresa May suffered yet another defeat last night (13 March) as a majority of MPs (321-278) voted to take a no-deal Brexit off the table permanently. The vote was aided by 12 Tory rebels, including four cabinet ministers.
The government’s own motion sought to reject the no-deal option only for March, while keeping it on the table long term. However, the motion was amended to take the no-deal option off the table entirely.
Sterling ended the day 2.4% higher vs. the dollar (13 March), before giving up some of that gain to end up 1.5% at USD 1.34 going into European trading. Sterling is also up 1.2% to EUR 1.17 against the euro since yesterday’s trading, the highest it has traded since May 2017.
Bellwether UK domestic companies are muted in early trading (14 March) with UK homebuilders flat and UK domestic banks Lloyds and RBS up 1% and 70 basis points respectively.
The equity market response may be tempered as there is still a great deal of uncertainty and the stocks have already run significantly this year, with homebuilders up 24% year to date and Lloyds up 22%.
In an ironic twist the defeat may help the prime minster get her deal across the line. Theresa May will hold another vote on her Brexit deal next week. Eurosceptic Tory rebels and the Democratic Unionist Party must make a decision on whether the prime minister’s deal is their best chance to secure Brexit or whether another opportunity will come about despite last night’s vote.
In the meantime there will be a third historic vote this evening on whether to ask the European Union (EU) for an extension to Article 50. The expectation is that this will pass.
Any extension has to be granted unanimously by the EU27, a group that is increasingly frustrated with what is going on in Westminster. Many EU members do not want to extend Article 50, particularly with EU parliamentary elections coming up in May, unless there is clarity on what Britain intends to do next.
If parliament votes in favour of May’s deal then a short extension is likely. A longer extension may be granted if either a general election, a second referendum or an alternative softer Brexit plan gains consensus in parliament. Simply extending Article 50 with no plan will face opposition from members of the EU27.
It has been made clear that renegotiation of the current deal is not on the table.
This means that a no-deal Brexit is not off the table. The British parliament will have to come to the EU with an action plan or revoke Article 50 entirely, which many would view as going against the will of the people.
If parliament can get behind May’s deal, a softer Brexit or a second referendum it is likely that sterling and domestic UK equities can continue to rally. However, the division within, and between, parties mean that this is no small task. All the while the clock continues to tick.
Chancellor Philip Hammond used his Spring Statement to tempt MPs into supporting the government’s deal. He has promised to spend a GBP 26.6 billion “deal dividend” and help end austerity as the UK’s public finances continue to surprise on the upside. This would help further boost UK equities if a deal is agreed with the EU.
Sources: Bloomberg, BBC, Financial Times, as at March 2019.
Click here for part IV
Callum Abbot is the portfolio manager for the JPM UK Equity Plus Fund
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