March 19, 2019
Peter Donisanu, Investment Strategy Analyst
Peter Wilson , Global Fixed Income Strategist
Brexit: When Will It End?
- Last week, members of parliament (MPs) in the U.K. House of Commons voted to request an extension on Brexit Day after they voted down the government’s Withdrawal Agreement.
- This week, MPs could debate and vote on the agreement once again. If that agreement fails, Prime Minister Theresa May will seek an extension, but for how long and for what purpose still needs urgent clarification.
What It May Mean for Investors
- For the markets and global economy, a no-deal Brexit remains a key threat. While we believe that this risk is contained for now, this could change, since parliamentary decisiveness, or indecisiveness, will determine future likelihood of a no-deal Brexit (in concert with the European Union (EU)).
The U.K. parliament again failed—as a collective—to decide on what it wants from Brexit. To be sure, last week, a majority of MPs told us what they don’t want: Theresa May’s Brexit deal, or a “no-deal Brexit.” This led to Thursday’s vote to delay Brexit. With time running out, MPs are considering another vote this week. If the agreement is rejected again, they will need to agree on a way forward, if the EU is to grant the UK government’s request for an extension of the Brexit date. We believe that lawmakers will do what is necessary to avoid a no-deal Brexit this week. With that said, the risk of a no-deal Brexit is not entirely off the table, given parliament’s indecisive track record. Consequently, we are monitoring a few risk-related milestones in the weeks ahead.
How did we get here?
Our recent reports have highlighted the perils of a no-deal Brexit, along with its implications for the eurozone economy and potential financial market impact.1 For those investors that are still trying to figure out how we arrived at a time within days of Brexit Day with no solution forward, we offer an illustrative analogy. Imagine being asked to visit a local diner and order the daily special. You are not sure what the daily special will look like, but a lot of very influential people asked you to go through with it, so you are obliged. By the way, you will need to bring along 649 of your closest friends.
We might say that “chef” Theresa May’s proposed Brexit agreement with Brussels is offered with no substitutions allowed—i.e., a “daily special” with steak medium rare, mashed potatoes, and salad, with dressing on the side. A straightforward request from your constituency: visit the local diner and have the daily special. Simple, right? Not so for your other friends, who happen to have constituencies of their own. Unfortunately, you can’t find a majority within your 649 friends to decide upon the daily special, because some prefer their steak at a different temperature, while others prefer dressing served on their salad.
Where does this leave us?
It is late in the evening, and the restaurant’s proprietor is growing impatient. You need more time for your group to decide, but how much time? The potential vote on May’s deal this week will determine whether they need between 3 and 18 months to take the daily special, agree on a different order for the group, or walk away from the local diner altogether. If the vote actually takes place, and if the agreement passes, a short technical delay is all that is needed. If the vote fails again, a longer extension could give way to other Brexit options, including remaining in the EU.
This week, we believe that an immediate risk for financial markets is that an indecisive parliament fails to provide EU leaders with an acceptable rationale for delaying Brexit. Looking through the anticipated political posturing, we believe that parliament’s plan for requesting an extension must lead to some discrete outcome to justify a Brexit delay (general elections, referendum, a Plan B, among other options). This is important, because a decision to extend Brexit Day must be unanimous among EU leaders. In other words, we believe that MPs this week must prepare a strong argument for an extension to secure much needed EU consensus for a delay.
Nevertheless, we believe that lawmakers will be motivated by the quickly approaching March 29 deadline—and will find consensus on a definitive plan to present to the EU, avoiding a no-deal Brexit in the near term. Assuming that a longer delay is secured, other risks of a no-deal Brexit could resurface, even if elections or a second referendum are called—and if they just lead back to where we are today. This is a longer-term risk. Nonetheless, assuming that an extension is secured this week, we expect European risk assets (such as U.K. stocks and pound sterling) to rally on the positive development.
While we anticipate a positive Brexit outcome in the near term, we believe that investors hoping for a rally are best served to wait until after Theresa May meets with her counterparts at Thursday’s EU Summit, when we will have a better sense for EU leadership’s buy-in on a Brexit delay. This is to account for the potential fluidity of Brexit-related developments as we have experienced over the past few months. For now, we believe that the Brexit saga will end, and that a no-deal Brexit will be avoided only when parliament finally decides on a collective path forward. We are hoping that this happens this week.
1 For more information, please see our Global Perspective reports: “Brexit—No Deal Risks on the Rise”, published on February 12, 2019, and “Eurozone—Another Risk for the Markets’”, published on February 20, 2019.
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