Brexit vote – an explainer
You may have heard that there’s a very important vote in UK parliament on Tuesday. This is expected to cause high market volatility, particularly in the UK 100 index and GBP crosses.
But what are the longer-term ramifications for the markets, based on the many scenarios that could unfold from here?
The easy ending
The key vote – delayed from 11 December last year – will see MPs vote on Prime Minister Theresa May’s plan for the UK’s withdrawal from, and future relationship with, the EU.
The best outcome for the markets could well be for the deal to be voted through by MPs. This scenario will give markets the certainty they crave. It will usher in an ‘orderly Brexit’ on March 29 and the UK will begin negotiations with the EU on the terms of a future trade deal with the EU.
This would need to be agreed by the end of 2020 to avoid triggering the Irish border backstop, keeping EU customs rules in place.
This scenario presents a buying opportunity for the pound and UK assets, which have been sold off regularly at every sign of uncertainty during the Brexit process since the referendum vote in 2016.
Other outcomes: no deal, a second referendum?
A new deal, a new government, a delayed Brexit… if parliament rejects the deal (which is looking likely) a few things could happen. Parliament could accept that the UK will leave the EU on March 29 without a deal: the no-deal Brexit scenario, which overwhelmingly presents a sell opportunity for sterling and UK assets owing to huge uncertainty.
Alternatively, parliament may request that Theresa May’s deal is renegotiated with the EU. If the EU accepts renegotiation, then another deal option will be hashed out, which will then return to the House of Commons for another vote. If this deal is accepted, we return to the ‘orderly Brexit’ situation. If not, we’re back to square one and parliament either has to vote for a no-deal Brexit or request another round of renegotiations with the EU.
If the EU rejects requests for negotiations then we either head to a no-deal Brexit or Article 50 is extended, possibly culminating in another referendum or a general election. This scenario is again likely to present a negative outlook for the pound and UK assets due to uncertainty.
What’s most likely?
Intertrader’s Chief Market Strategist Steve Ruffley believes some sort of deal is the most likely outcome, which could even potentially boost GBP/USD back up to the 1.60 level. However, don’t forget that, even if some sort of deal wins through, it will still mean some amount of long-term uncertainty for sterling and UK assets as the UK and EU embark on new trade negotiations and decide the exact nature of their future relationship.
Watch the numbers
Much also depends on the exact number of votes on Tuesday. If Theresa May loses by a small margin, she might feel she could try her deal again. If the deal is voted down by an enormous margin, this will probably kill it dead. Somewhere in between might force the EU into showing more leeway in a renegotiated deal. Remember that the eurozone has problems of its own and is also vulnerable if there’s a no-deal Brexit. Will the EU finally blink and decide it needs to do whatever it takes to work out a deal?
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.