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The pound surged yesterday.
It rose above $1.32 to the US dollar, and to a two-year high against the euro of €1.16.
That can only mean one thing.
That a "clean/no-deal/hard" (delete according to political bias) Brexit has become less likely.
The pound thinks we're going to get May's deal or no Brexit
Whatever you think of Brexit and the British economy's long-term prospects, the view in the market is pretty clear. For now, investors buy the pound when they expect the status quo, or something close to it, to prevail. They sell the pound when they're worried that we'll see a change.
That makes sense. After all, before the Brexit vote, the pound was deemed to be worth about $1.45. If Brexit was cancelled altogether, logic suggests that it should be back up around that level again.
If Brexit goes ahead, on the other hand, there's far less clarity. And where there's less clarity, investors are less keen to hang on to an asset.
This is not a judgement as to whether Brexit will be good or bad for the economy; nor does it indicate a permanent state of affairs (currency markets are fickle beasts). It's just a statement of what is currently obvious. You have to take markets as they come they don't make allowances for your political leanings.
So the fact that the pound went up quite significantly yesterday (which had the knock-on effect of pushing the FTSE 100 lower) shows that markets think that we're on course for either a status quo Brexit deal or no Brexit at all.
So what actually happened yesterday to encourage this view?
There were two main things, and one of them in fact happened on Monday night.
Firstly, Labour leader Jeremy Corbyn finally decided following mass defections from his party that his main shot at getting to be prime minister now lies with backing a second referendum.
For a man of unbending principles, he can be pretty flexible when he wants to. And this is worth remembering. The ultimate flaw with Corbynite thinking is the idea that "the ends justify the means", which in turn justifies pretty much any amount of awfulness as long as it's done in the name of your eventual socialist utopia.
If you think that's hysterical or histrionic in some way, I simply urge you to pick up a history book and acquaint yourself with what hard left movements do. Or take a look at Venezuela.
Anyway, while this was eye-catching, it's probably not the most important thing (unless we do end up with a general election). The most important thing was Theresa May delivering something of a thinly-disguised ultimatum: either you back my deal, or you risk getting no Brexit at all.
It's May's way or no way at all
That, of course, is not what she said. But it is the upshot. Here's what's going to happen.
On or before 12 March, MPs will get another chance to vote on May's withdrawal agreement. If that fails, then on 13 March, they'll get to vote on whether they want to leave the EU with no deal at all. If the answer to that is "no", then on 14 March, there will be a vote on a "short, limited" extension of Article 50.
So what does that mean?
Well, let's assume that May's deal is rejected again. And we know for sure that the idea of leaving with no deal will be rejected too. So the odds are that the House of Commons then votes for an extension.
May would like that extension to be short. But, as the FT points out, "May would not be in control of the Brexit extension and MPs could amend the motion to seek a much longer delay some in Brussels have said the EU would prefer a delay of more than a year."
As a result, the eurosceptics within the Conservative party (led by Jacob Rees-Mogg) plus the Democratic Unionist party, appear to be softening their tone a bit on May's deal.
And you can see why. If May's deal doesn't pass, then yes, theoretically, the "no-deal" Brexit is still in play, if perhaps three months down the line. But to say that the "remain" tendency has been emboldened by the shenanigans of the last few months has to be the understatement of the decade.
If there is a delay, and you then have Labour actively campaigning for a second referendum, then it's very, very hard to believe (certainly from where I'm sitting, although I freely admit I may be missing something) that we'll get anything approaching a "clean" Brexit.
Indeed, you start to run the risk of rolling delays to Brexit which then turns into a general election which then turns into a second referendum at some point in the 2020s for all we know.
We'll update on this as the votes become closer (or as we get more melodramatics in the House of Commons). But it's clear to me that unless something very odd happens, we now either get a version of May's deal, or we get an ongoing limbo state. Either of those options means a stronger pound.
So if you've been "overweight" non-sterling assets in your portfolio since the Brexit vote, you might want to review that. I'm not saying you should change anything. But if you have been actively planning to lock in some profits driven by currency fluctuations, then it might be a good time to do it.
Oh, and if you want listen to a podcast on the EU that will make your blood boil (although for different reasons, depending on your attitude towards the EU), please be sure to listen to my colleague Merryn's interview with Bernard Connolly you can catch it here.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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