Brexit Special: What next?

Summary:

• Article 50 extension likely - but length could be disputed
• Don't rule out a 3rd meaningful vote
• UK100 remains remarkably calm and near 2019 peak

The pound is attempting to make something of a recovery after yesterday’s swift plunge, with the currency showing a heightened sensitivity to the latest Brexit twists and turns in recent days. After a strong rally on Monday, built on the hope of a significant breakthrough on the backstop, sterling handed back nearly all the gains yesterday as it was revealed that little had ultimately changed and the latest deal was resoundingly beaten in parliament. As the dust settles the GBP/USD trades towards the middle of its recent $1.30-1.33 range and while it has been a dramatic few days, there’s not really been any significant tangible changes as far as the markets are concerned. Given the wild gyrations in the currency markets, UK stocks have been remarkably sanguine, with the FTSE remaining well supported and not far from its highest level of the year around 7260 - a region that now also coincides with the 200 day SMA and could be seen as potential resistance.   

The FTSE has been fairly quiet in recent trade, with the benchmark remaining well supported and not far from its 2019 high of 7260 - a region that also coincides with the 200 day SMA

UK likely to seek extension

Brexit will continue to dominate the headlines in the coming days, but unless there’s a major shock MPs will vote first against a no-deal and then in favour of an extension to the Article 50. Despite some not too conciliatory remarks from Michel Barnier, the EU27 will still likely approve an extension - largely to avoid the perception they drove the UK out without a deal. Given that it’s just a couple of months till the EU elections, the extension is likely to either be short or long-term, with little middle ground. The UK is believed to favour an extension of 2-3 months whereas the EU has reportedly taken a preference for a longer period of almost 2 years that they believe would pretty much negate the need for a time limit on the Irish backstop. The main issue from the UK’s perspective is that a longer extension will likely mean greater contributions to the EU budget and would be a hard-sell politically for PM May.

Third time lucky?

Should the UK parliament vote against a no-deal Brexit but fail to easily agree terms on an extension with the EU shortly after, there is a chance that the government will return for a third meaningful vote. Despite the losing margin of 149, the gap has been closed and would now require 75 MPs to flip. While this sounds a stretch, the bulk of these votes could be gained from the ERG and DUP, who may be tempted to plump for the deal if they strongly oppose a long extension to Article 50 which they may believe would pave the way for the chance to hold a second referendum. Given the wafer thin majority for the government they would require almost every member of the ERG and DUP to fall in line, but this is possible. PM May’s strategy of brinkmanship thus far has been to play off her deal against a no-deal, but it the latter is taken off the table, it is feasible this will cause a shift to her deal vs an extension (which would likely mean a softer Brexit or even no Brexit at all) and this could see more party rebels fall in line.    

UK budget unlikely to reveal any major changes

Chancellor Philip Hammond is set to deliver his Spring Statement later on today, but given the high levels of uncertainty surrounding Brexit it is unlikely to contain any major policy shift. Forecasts for economic growth from the OBR will almost certainly be revised lower and while Brexit uncertainty has likely played a part, this is really more a reflection of a global slowdown. Hammond will likely reveal that public finances are on a firmer footing but don’t expect any big giveaways, with the chancellor expected to keep his powder dry in case a fiscal response is needed due to untoward shocks on the Brexit front.       

Lastly, Eurozone industrial production has bounced back according to the latest data, with a month-on-month of 1.4% seen for January. While this improvement is welcome it does come from a low base (December’s figure was -0.9%) and does little to suggest the longer term slowdown has reversed course just yet.