Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
What today's Brexit debate means for UK assets
Michael McKenna
Head of Editorial Content, Saxo Bank
Summary: Brexit has grown into a baroque and shambling thing over the past two years, but the message for investors in the UK currency and UK assets remains fairly simple.
Today, the UK parliament will debate Prime Minister Theresa May’s ‘Plan B’ motion for Brexit, as well as several other proposals tabled by other MPs. The session comes in the wake of May’s resounding defeat on January 15, when her controversial Brexit deal was rejected by a majority of 230 MPs.
Although Brexit is commonly mentioned in the context of other populist successes, such as the election of US president Donald Trump and the Five Star-Lega coalition government in Rome, the push to extricate the UK from the European Union lacks coherent parliamentary backing. Among Conservative party members, militant Leavers vie with pragmatic deal-seekers, proponents of a second referendum, and a motley selection of mountebanks and careerists looking to use the Brexit chaos as leverage for their own ambitions against PM May’s weakened leadership.
Among the opposition, Labour Party leader Jeremy Corbyn is struggling to stay afloat atop a restive sea of pro-Remain MPs and voters who question his reluctance to support a second referendum, as well as a smaller core of supporters wary of rejecting the popular will as expressed in 2016.
What’s next?
For markets, the most unwelcome outcome is a ‘no-deal’ Brexit that would see Britain simply ‘crash out’ of the EU come the March 29 Article 50 deadline with no agreement on the nature of their future relationship. As such, today’s two major pivot points are the amendment tabled by Labour’s Nick Boles and Yvette Cooper, and the proposal of Tory MP Dominic Grieve.
The former, if approved, allow PM May until February 26 to get a deal approved; if she cannot do so, parliament would then vote on an extension of Article 50.
The latter is somewhat similar, and proposes that MPs be given the opportunity to make their own proposals on Brexit: While this could open the field to renewed calls for solutions such as a second referendum or a ‘Norway-style’ association (both ), it lacks the guarantees of the Boles/Cooper proposal, and has been criticised by Cooper as having “limited effect”.
Beyond these two amendments, today’s debates will see parliament address other proposals with less bipartisan support, such as the Liberal Democrats’ call for the government to rule out a no-deal exit and prepare for a second vote, a Tory proposal to simply rule out a no-deal exit, a series of proposals meant to block the Northern Ireland backstop, and others.
Although Brexit is commonly mentioned in the context of other populist successes, such as the election of US president Donald Trump and the Five Star-Lega coalition government in Rome, the push to extricate the UK from the European Union lacks coherent parliamentary backing. Among Conservative party members, militant Leavers vie with pragmatic deal-seekers, proponents of a second referendum, and a motley selection of mountebanks and careerists looking to use the Brexit chaos as leverage for their own ambitions against PM May’s weakened leadership.
Among the opposition, Labour Party leader Jeremy Corbyn is struggling to stay afloat atop a restive sea of pro-Remain MPs and voters who question his reluctance to support a second referendum, as well as a smaller core of supporters wary of rejecting the popular will as expressed in 2016.
What’s next?
For markets, the most unwelcome outcome is a ‘no-deal’ Brexit that would see Britain simply ‘crash out’ of the EU come the March 29 Article 50 deadline with no agreement on the nature of their future relationship. As such, today’s two major pivot points are the amendment tabled by Labour’s Nick Boles and Yvette Cooper, and the proposal of Tory MP Dominic Grieve.
The former, if approved, allow PM May until February 26 to get a deal approved; if she cannot do so, parliament would then vote on an extension of Article 50.
The latter is somewhat similar, and proposes that MPs be given the opportunity to make their own proposals on Brexit: While this could open the field to renewed calls for solutions such as a second referendum or a ‘Norway-style’ association (both ), it lacks the guarantees of the Boles/Cooper proposal, and has been criticised by Cooper as having “limited effect”.
Beyond these two amendments, today’s debates will see parliament address other proposals with less bipartisan support, such as the Liberal Democrats’ call for the government to rule out a no-deal exit and prepare for a second vote, a Tory proposal to simply rule out a no-deal exit, a series of proposals meant to block the Northern Ireland backstop, and others.
The latest
Yesterday evening, May launched an amendment of her own, calling for parliament to approve her divorce deal with the EU-27 on condition that the “backstop” is replaced with some unspecified novel mechanism. Though this will likely placate some of the more moderate Conservative opposition, it has already met with disapproval from the most fervent Tory Brexiteers, and is also facing opposition from the EU-27, who still maintain that a backstop – or guarantee of no hard border on the island of Ireland in any circumstance – is no longer a valid insurance policy if subject to a time limit.
For the 27, the British prime minister is merely reneging on something to which she has already agreed. So, although May could win approval for this new plan in the UK parliament tonight, we are still a long way from a solution and ever closer to cliff-edge Brexit.
Sterling and sentiment
The GBP and UK market sentiment moves in an inverse relationship to the chances of a no-deal Brexit. Overall, UK assets are Remainers, rising when Brexit – whether of the deal or no-deal variety, though with the latter provoking much more distemper – is delayed or imperiled, and falling when it moves closer to occurring.
The problem for GBP and UK investors is the same as the one facing all investors in our late-cycle circumstance: Brexit could twist and turn for longer than most can stay solvent.
Brexit is a revolutionary programme placed in the care of managers. Departing the EU is a move of unprecedented severity, and yet it is being implemented (or failing to be implemented) by people trained to seek and require continuity – of their own careers, if nothing else.
In these artificially still waters, Brexit has grown into a strange and baroque thing. Whether it survives to maturity, collapses under its own weight, or is felled by some future ballot’s blow, there is little that is clear about Brexit except this:
British assets are afraid of it.
Allocate accordingly.
Yesterday evening, May launched an amendment of her own, calling for parliament to approve her divorce deal with the EU-27 on condition that the “backstop” is replaced with some unspecified novel mechanism. Though this will likely placate some of the more moderate Conservative opposition, it has already met with disapproval from the most fervent Tory Brexiteers, and is also facing opposition from the EU-27, who still maintain that a backstop – or guarantee of no hard border on the island of Ireland in any circumstance – is no longer a valid insurance policy if subject to a time limit.
For the 27, the British prime minister is merely reneging on something to which she has already agreed. So, although May could win approval for this new plan in the UK parliament tonight, we are still a long way from a solution and ever closer to cliff-edge Brexit.
Sterling and sentiment
The GBP and UK market sentiment moves in an inverse relationship to the chances of a no-deal Brexit. Overall, UK assets are Remainers, rising when Brexit – whether of the deal or no-deal variety, though with the latter provoking much more distemper – is delayed or imperiled, and falling when it moves closer to occurring.
The problem for GBP and UK investors is the same as the one facing all investors in our late-cycle circumstance: Brexit could twist and turn for longer than most can stay solvent.
Brexit is a revolutionary programme placed in the care of managers. Departing the EU is a move of unprecedented severity, and yet it is being implemented (or failing to be implemented) by people trained to seek and require continuity – of their own careers, if nothing else.
In these artificially still waters, Brexit has grown into a strange and baroque thing. Whether it survives to maturity, collapses under its own weight, or is felled by some future ballot’s blow, there is little that is clear about Brexit except this:
British assets are afraid of it.
Allocate accordingly.
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