Brexit vote: kicking the can down the road

Julian Chillingworth and Ed Smith

The Brexit saga has taken a predictable turn, though the rout that Prime Minister Theresa May suffered in Tuesday’s Parliamentary vote on her Brexit deal was historical in its magnitude. The vote doesn’t really change much, though, other than making an extension of the Article 50 period more likely. Sterling has moved a bit higher in response, but we will continue to keep a close eye on the currency as an important barometer of investor sentiment, and expect volatility to continue.

Mrs May’s loss was much larger than generally anticipated, with some 118 of her own MPs siding with the opposition. This set up the widely expected call by opposition leader Jeremy Corbyn for a vote of no confidence in the Government, taking place this evening.

Mr Corbyn is not expected to win, as the DUP are currently saying they will side with the Prime Minister, and journalists are reporting that members of the pro-Brexit European Research Group will too. Recall also that she comfortably won the vote of confidence within her own party in December, with no obvious challenger stepping forward.

Mrs May is likely to return to the despatch box on Monday with her plan B, having been to Brussels to try to negotiate some amendments to her deal, particularly around the Irish backstop. We doubt the EU would agree to anything more than tweaks to the soundly rejected plan.

The Tuesday vote was typical brinkmanship, which the European Union (EU) is indulging in too. Jean-Claude Juncker, head of the EU Commission, is playing hardball saying time’s almost up; EU Council President Tusk has noted that the risk of no deal has increased.

But Tuesday’s vote does demonstrate that the axis of power is shifting away from Mrs May and her Government and toward Parliament, and especially Speaker John Bercow who controls the flow of business. Last night Mrs May said that she was in listening mode after her defeat. But it’s unlikely that she will forgo enough of her red lines and that any Brexit deal she’s willing to propose would be approved by the majority of MPs.

What is more likely is that there will be a push by Parliament to postpone Article 50 for at least two-to-three months or even repeal the Withdrawal Bill altogether, while a series of options are discussed and voted on from a hard Brexit through to a Norway-style soft Brexit or the option of a second referendum.

The proverbial can is likely to be kicked down the road, the ‘never-ending story’ that our Brexit decision tree has consistently highlighted as the most likely scenario. This morning sterling is steady, which suggests to us that investors also see a reduced risk of a no deal outcome.

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