Markets are starting to think that “no deal” Brexit is off the table – are they right?

Jacob Rees Mogg © Getty Images
Markets at least seem to have calmed down about Brexit

This article is taken from our FREE daily investment email Money Morning.

Every day, MoneyWeek's executive editor John Stepek and guest contributors explain how current economic and political developments are affecting the markets and your wealth, and give you pointers on how you can profit.

Sign up free here.

There’s a lot going on in the world right now. From Brexit, to trade wars with China, to the end of quantitative easing in particular, there’s a lot that could go wrong for markets this year – which could, of course, create plenty of opportunities for the cannier investor.

I’ll be talking about those opportunities and where they might lie with value investor Tim Price and Iain Barnes of Netwealth at our event on 12 February. You don’t want to miss it – book your ticket now!

And speaking of threats and opportunities, let’s turn to everyone’s favourite topic du jour.

Brexit.

Why have markets perked up about Brexit?

I’ve taken a short break from writing about Brexit for the last week or so because there hasn’t been much to say. There’s been a lot of political posturing on every side, but not a great deal of clarity.

However, it looks as though markets are starting to come to a conclusion of sorts. So I think it’s time we had a quick look at what’s going on again.

The best barometer of market sentiment toward Brexit, and investors’ expectations thereof, is the sterling exchange rate. It’s clear that as far as markets are concerned, regardless of anyone’s personal political views (markets are like that), the softer the Brexit, the stronger the pound.

So when the pound spikes higher – as it did yesterday, getting back above the $1.30 mark to reach its highest level since November – it suggests that markets think that we’re either heading for a softer Brexit, or for no Brexit at all.

Why would they think that? Let’s take a look at the timetable and the latest lot of factioneering in Parliament to get an idea.

The next big vote is scheduled for Tuesday 29 January. That’s where MPs get another opportunity to say whether they want to give Theresa May’s withdrawal agreement the go-ahead – or whether they want to toss it back to her again.

Various solutions have been suggested for the biggest sticking point – the backstop agreement, which is designed to avoid any sort of border between Ireland and Northern Ireland.

Jacob Rees-Mogg – the effective leader of the Conservative eurosceptic faction – indicated yesterday that a reformed version of the prime minister’s deal could win his group around. But it’s not clear that anyone can come up with anything that will fit the bill.

Meanwhile, various other MPs have been pushing through various amendments which are all aimed at preventing “no deal”. At the moment, the default is that the UK will leave the EU at 11pm on 29 March, regardless of whether parliament and the EU have managed to hammer anything out between them.

My own suspicion is that this would not be the end of the world as many have portrayed it, but I won’t go into that right now – that’s a topic we’ve been discussing a lot in MoneyWeek magazine, and will no doubt continue to do so. (I imagine it’ll come up at our event on 12 February as well – don’t forget to book your ticket).

An attempt to take “no deal” off the table

So why is the pound suddenly looking more chipper? It’s mainly down to a specific amendment tabled by Labour’s Yvette Cooper (who is in effect, the leader of the opposition within the opposition, if you get what I mean) along with Conservative MP Nick Boles.

In effect, if May’s deal fails to pass on 29 January, the Cooper-Boles amendment – which looks as though it has the backing of both Labour and sufficient Conservatives to pass – would allow MPs to vote to extend the Article 50 process by nine months if a deal is not agreed by 26 February.

There’s a lot of arguing about whether this would be legally binding or not. There’s also talk of “proroguing parliament”, which basically means shutting it down in order to thwart the amendment if it passes.

And of course, there’s the reasonable point that even if the MPs extend the process, they still need to come to a decision at some point. And of course, even if it passes, the European Union could just turn around and say: “No, you can’t have an extension.”

However, I’ve always found that the best option when you’re trying to gauge what might happen in a situation that’s largely governed by human decision making, is to find the path of least resistance. We all have a tendency to defer tough decisions, and the more people involved, the harder it is to resist that impulse.

And as I said last time I wrote about this, the path of least resistance out of this particular quagmire is for the process to be pushed back – for the Article 50 process to be extended. And this appears to be the way by which it might be done.

What happens next?

I can see why Rees-Mogg and his team are now thinking of backing May’s withdrawal agreement, because it’s becoming clear that it might be the best chance they have of ever getting any sort of Brexit.

The tricky thing is this: if May’s deal now fails, then Brexit on 29 March is no longer as definite as it might once have looked. If May’s deal fails (seems quite likely), and the amendment does get passed (seems likely), and the MPs do vote to extend Article 50 (likely), and the EU does accept that (likely), then a whole load of other scenarios open up, many of which lead to no Brexit at all.

Of course, every pro-Remain MP in the house now has their hopes up on that front too, so it makes the odds of May’s deal getting through even harder to predict, because some of them might be inclined to cross their fingers for the extension option, rather than the relatively soft Brexit offered by the withdrawal agreement.

In other words, you can see why markets suddenly feel a bit cheerier about the pound. It now looks as though we either get May’s withdrawal agreement – which markets had become broadly comfortable with in any case – or we get an extension to Article 50, which both delays any Brexit at all and makes any eventual deal at least as soft as the one that’s currently on the table.

Now don’t get me wrong. There’s many a slip twixt cup and lip and markets are nervy beasts. And there’s plenty more time for last-minute twists here.

However, if you have been looking to buy UK assets on the cheap, then the window of opportunity might be closing.

Don’t miss our event on 12 February – by then we’ll hopefully have a bit (just a bit, mind!) more clarity as to what might be coming next for Brexit.

 

Don’t wait until March
Take back control of your investments NOW
Try 6 free issues then pay only £2.45 per issue
(normally £4.25)
Turn a no deal into a profitable one
SUBSCRIBE TO MONEYWEEK NOW

 

disfi.com