Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The three most likely outcomes of Tuesday’s Brexit vote
Christopher Dembik
Head of Macroeconomic Research
Summary: It is difficult to see any outcome of Tuesday's Brexit vote that will not ultimately prove negative for the UK economy and British assets.
It is a near-impossible task for UK prime minister Theresa May to get close to the 320 votes she will likely need to pass the deal she negotiated with the European Union. Over the past few weeks, she has dispatched her cabinet ministers around the UK to make the argument for the deal and to insist that she can still win; behind the scenes, however, most of them except the most loyal believe victory is impossible.
May has not been able to reach a deal that would unite her party so we can expect that the hard Brexiters of the Conservative Party will vote against the deal along with the DUP and most members of Labour. All the most likely outcomes are negative for the UK economy and the pound sterling as they will contribute to the ongoing period of uncertainty.
What’s next?
Scenario 1: May goes back to Brussels to renegotiate
Some MPs and high-profile cabinet ministers believe that there won’t be any change in Brussels until after the PM’s deal is shot down in Parliament. However, it is hard to see EU leaders willingly reopening negotiations after taking months of hard work to reach a unanimous agreement, including on the thorny issue of the future of UK-administered Gibraltar. In the best case, the EU and May can agree to cosmetic changes but it is uncertain whether it will be enough to convince Parliament to vote the new deal.
Scenario 2: May seeks a second referendum
May could also call another popular referendum in order to seek further clarity on what citizens actually want. In our view, this would be no great help. The government faces exactly that same problem as two years ago – Britain is extremely divided on Brexit.
Scenario 3: May resigns
If May suffers a heavy defeat, she might be pushed out by her cabinet. A leadership election would then take place. The winner will have the difficult task to negotiate a Norway-style soft Brexit or a Canada-style hard Brexit – both of which would be disastrous for the British economy.
May has not been able to reach a deal that would unite her party so we can expect that the hard Brexiters of the Conservative Party will vote against the deal along with the DUP and most members of Labour. All the most likely outcomes are negative for the UK economy and the pound sterling as they will contribute to the ongoing period of uncertainty.
What’s next?
Scenario 1: May goes back to Brussels to renegotiate
Some MPs and high-profile cabinet ministers believe that there won’t be any change in Brussels until after the PM’s deal is shot down in Parliament. However, it is hard to see EU leaders willingly reopening negotiations after taking months of hard work to reach a unanimous agreement, including on the thorny issue of the future of UK-administered Gibraltar. In the best case, the EU and May can agree to cosmetic changes but it is uncertain whether it will be enough to convince Parliament to vote the new deal.
Scenario 2: May seeks a second referendum
May could also call another popular referendum in order to seek further clarity on what citizens actually want. In our view, this would be no great help. The government faces exactly that same problem as two years ago – Britain is extremely divided on Brexit.
Scenario 3: May resigns
If May suffers a heavy defeat, she might be pushed out by her cabinet. A leadership election would then take place. The winner will have the difficult task to negotiate a Norway-style soft Brexit or a Canada-style hard Brexit – both of which would be disastrous for the British economy.
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