Macro Digest: UK government suffers historic loss

UK Prime Minister Theresa May saw her already controversial Brexit bill roundly and conclusively defeated in Parliament Tuesday evening with uncertainty on the future of both her government and Brexit itself dominating sentiment into today's vote of no confidence.

Here is how we see the state of play from here.

Market reaction

• GBPUSD almost unchanged with a small overnight rise leaving it at 1.2861 in the wake of today's opening bell.

• We look to tactically sell GBPUSD towards 1.2880/1.2900 as the market is over-interpreting the likelihood of no Brexit (stop loss 100 pips).

• We estimate the most likely event to be a general election called before the end of next week. The Tories will be judged “guilty” in failing to deliver the British public vote and will be seen as destructive for the UK economy; we still see the UK, together with Germany, as having the biggest risk of recession in 2019.

Analysis

PM May’s final attempt to get her deal through failed – she lost a massive 230 votes. May accepted defeat and also accepted the tabled debate of a “vote of confidence” set to happen today.

She also offered the following guarantees:

She will honour the votes of June 2016.

• The government will openly listen to solutions to solve the impasse.

•  The UK will stand by Northern Ireland and the Good Friday agreement.

The Financial Times' Henry Mance says that 196 Tory MPs voted with May, but 118 voted against. Only three Labour MPs voted for the deal and 248 voted against.

As expected, the Scottish National party (35 MPs), the Democratic Unionist party (10) and the Liberal Democrats (11) all voted against. The decision was overwhelming.

In terms of the “no-confidence debate”, it will most likely fail, but May is now more likely than not to call a general election as her “exit routes” are now fully blocked. She suffers from a lack of political capital in both Parliament and Europe.

Several European Union leaders are already out escalating the preparations for hard exit. Mind you, there is still less than a 10% probability of this happening.

The most likely path from here is:

•  A vote of confidence debate tomorrow, where PM May and her government will prevail.

•  A failed “spring” to secure extension/improvement of the deal, which will fail.

•  By the end of next week we will be in "full general election" mode and the EU will meet in late January to extend the Brexit deadline, most likely from March to the end of 2019.

Conclusion

• The market is too optimistic on a second referendum, naively thinking the chance of a no-Brexit outcome is now more likely, but listening to and analysing today’s comments I feel less certain that a second referendum will happen. The British publish doesn’t want it, according to a YouGOV poll conducted Tuesday morning (just 8% say Yes) and Parliament is “eager not to betray the June 2016 vote".

• A general election called after a short week of exploratory talks with a full Parliament.

• An extension of the March deadline by the EU Council of Ministers... despite all their harsh talk.

• No hard Brexit – which would hurt both UK and the EU.

• GBP targeting 1.2000 in its run into the UK election.