Brexit: In All the Noise, Has That Much Changed?

UK markets experienced another week of high political drama, as the twists and turns of the Brexit negotiations continued to impact asset prices. Government bond yields and the British pound fell to lows for the year as the government withdrew the Brexit bill, which in turn prompted a challenge to Theresa May’s leadership. In the event, May prevailed in the leadership vote, but was forced to announce that she would make way before the 2022 General Election. While this certainly helped her win the vote, it leaves her authority challenged as she negotiates with the European Union (EU).

Thereafter the second half of the week proved no less dramatic. After guiding expectations towards further negotiations at the EU summit and beyond, a tense set of meetings deflated the optimism around a negotiated compromise.

So where does that leave the UK now?

Three potential outcomes

Whilst trying to chart the precise course of the Brexit negotiations is extremely challenging, there appear to be three broad outcomes:

  1. Withdrawal bill passes: There is still the chance that the UK and EU can successfully navigate the current impasse such that both the UK and EU Parliament pass the negotiated withdrawal bill and the process moves on to discuss the future trading arrangement. While we still see a material chance of this happening, it is perfectly possible that the current impasse remains, in which case two potential options arise.
  2. No deal: The first option is that the UK still leaves the EU on 29 March 2019, but with no deal and therefore moves to trading on World Trade Organisation rules. As there seems nothing close to a majority of British MPs who would accept this, we see this as a low probability event.
  3. Article 50 extension: Rather, we believe that MPs would either legislate to extend the Article 50 period (where the UK continues to temporarily remain in the EU) or revoke the Article 50 notice, pending greater clarity on the way forward. In each case the status quo would continue.