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A few days ago, markets thought that Brexit was settled. The pound spiked higher and traders were tentatively starting to think that the action was over.
Now, after yet another day of high drama in Parliament, it seems that things are up in the air again.
The pound slid from its recent high above $1.32 and the FTSE 100 – well, the FTSE 100 went up because it prefers a weak pound. (We’ll be discussing all this, among other things, at our event on February 12th – do book your ticket if you haven’t already).
So what caused the reaction? And what happens now?
Turns out that MPs aren’t taking control after all
By the end of last week, markets thought that no-deal Brexit was off the table. MPs were expected to pass an amendment proposed by Labour’s Yvette Cooper that would have allowed them to ask for an extension of Article 50 if nothing had been agreed by the end of February.
I wrote last week that it did seem a likely outcome. Although I also noted that there’s many a slip twixt cup and lip. And so it turned out.
Some amendments did get passed in the House of Commons yesterday. But not the one that markets had been hoping for.
The big sticking point with Theresa May’s withdrawal agreement has always been the “backstop”. This is designed to prevent a hard border between Northern Ireland and the Republic of Ireland. Trouble is, a lot of pro-Brexit MPs are worried that it could end up effectively keeping us in the EU permanently.
This is the main reason the prime minister’s deal failed on the first go round.
What happened yesterday is that MPs voted by 317 to 301 to support an amendment proposed by Conservative backbencher Graham Brady. The idea here is to replace the backstop with “alternative arrangements”.
Those alternative arrangements would, in effect, have to involve a method by which the UK could leave the EU fully, even if a mutually-agreed border solution hadn’t been reached. That means a time limit or a “unilateral exit mechanism” for Britain.
If that’s done, then it looks as though May should be able to get her withdrawal agreement through Parliament. Job done – everyone’s happy! Right?
Nope. It’s never that simple.
As far as the EU is concerned, the withdrawal agreement is done. They don’t want to re-open it, and yesterday it presented a united front, with the usual barrage of mildly sarky tweets from the usual suspects.
“Backstop means backstop”, if you like.
Interestingly, meanwhile, the Cooper amendment failed by 321 votes to 298. So the idea that MPs will effectively take over the House of Commons and force Article 50 back is no longer as cut and dried as it had appeared just a few days ago.
So what’s going to happen now?
The market thinks we’re in the same place as we were last week
Let’s look at the market reaction for some clues as to what might happen next. As we’ve noted before, the purest market barometer for Brexit expectations is the strength or weakness of the pound. The stronger the pound, the weaker the Brexit, in effect. (This won’t always necessarily be the case but it’s certainly the way markets see it for now.)
The pound strengthened last week because investors thought that the Brexit options had narrowed down to May’s deal or a delayed Brexit (viewed to imply either no Brexit or a very soft Brexit indeed).
The pound weakened yesterday because suddenly the chances of a “just leave” Brexit went up. But it’s hardly crashed. So that implies that markets still don’t think that we’ll leave on 29 March with nothing but WTO rules to govern our relationship with the EU.
So what are they thinking?
The way is now open to May’s deal getting through Parliament. So one side has moved a little. That’s positive. On the EU side, markets are probably assuming that, despite the immediate reaction, there will be a fudge that can be reached.
The risk, of course, is that whatever fudge the EU eventually proposes will not be to the taste of the DUP or the Brexit-backing Conservative MPs who she needs to get behind her to get the withdrawal agreement through parliament.
However, May has said that if she can’t get a deal by 13 February – so just a couple of weeks away – she will allow MPs another vote on the deal’s progress on 14 February.
That suggests that if we don’t get much movement, we might end up in the same place as we are now, only with six weeks to go until Brexit rather than two months.
By that point, no doubt the prime minister hopes that the pro-Brexit group might have decided that any deal is better than risking no Brexit at all. Equally though, the pro-Remain group will be thinking of other ways to push back Article 50, which is also something the EU will be aware of.
In effect, it looks to me as though we are roughly in the same place that we were a week ago. Which explains why the pound is also roughly in that same place.
I’m still happy to buy UK assets – markets have been too negative on them for some time now. But expect all the volatile headlines to continue over the coming weeks and months. And if you can bring yourself to ignore them, so much the better – it’ll help your blood pressure and you can use the time to do something more productive, like reading a good book.
I’ll be discussing the ramifications of Brexit for the markets with Tim Price and Netwealth’s Iain Barnes on the evening of Tuesday 12 February. Come along and bring your questions with you – you can book a ticket here.