Analyst reaction splits sharply after Brexit vote
By Oliver Haill
Date: Wednesday 16 Jan 2019
(Sharecast News) - Financial markets may remain cautious about British assets after the comprehensive defeat for the government's Brexit plan in the House of Commons on Tuesday, some analysts said, though others saw a decisive shift had created opportunities for gains.
After May lost the parliamentary vote by a historic margin of 432 to 202, the pound had returned to roughly the level it started the day against the US dollar, just over 1.288, after dropping as much as 1% in the hours before the vote drew near.
More positively, sterling rose 0.6% against the euro to 1.1278, its highest level in more than a month.
"Markets had widely expected PM May to lose the vote and thus we would be surprised if UK assets sold off much tomorrow," said Kallum Pickering, senior economist at Berenberg.
"The hopes that the big defeat for May's deal can make way for a softer Brexit outcome may neutralise any negative impact of higher uncertainty and the vote of no confidence."
Economists at UBS cautioned that UK assets "will continue to be vulnerable to the political volatility and we don't expect this will subside until a concrete conclusion emerges".
They added: "We do not advocate investors take directional views on sterling, gilts or UK stocks while this clarity void remains so large. Within existing portfolios, investors would be wise to limit any UK exposure at benchmark levels."
WHAT HAPPENS NEXT
Labour leader Jeremy Corbyn tabled a vote of no confidence in the government, with MPs voting on the motion at 1900 GMT on Wednesday.
This raises the chance of a general election, which would normally spook the markets, hitting the pound and UK stocks.
But as the Tory's Northern Irish confidence and supply partners the DUP said they will support the government and Conservative backbenchers rebels who opposed the Brexit vote fear the prospect of losing their seats in a general election, May is expected to fairly comfortably survive that vote.
In a speech to the Commons after losing the vote, May said if her government wins the confidence motion, she will then hold meetings with "colleagues, our confidence and supply partner the DUP and senior parliamentarians from across the house to identify what would be required to secure the backing of the house."
She said the government will approach these meetings "in a constructive spirit, but given the urgent need to make progress, we must focus on ideas that are genuinely negotiable and have sufficient support" in the Commons and if such ideas are agreed, "the government will then explore them with the European Union".
At this, Deutsche Bank strategists sniffed significant progress, saying that after more than two years since the UK triggered Article 50 to leave the EU, "a positive Brexit resolution is finally in sight... We turn bullish on the pound, and target 0.84 in EUR/GBP."
Deutsche took heart from May opening up Brexit negotiations to a cross-party approach, as securing votes from across the floor will allow her to circumvent the 20-30 Tory MPs who are committed to voting against any iteration of her deal.
"This pivot appears finally to be materialising. We believe that there remains scope to secure a parliamentary majority for a version of May's current deal, based primarily on a renegotiation of the Political Declaration on the Future Relationship towards a softer form of future relationship, to which the EU27 would be accommodating. We would anticipate...this could take place within weeks."
Similarly, while Tuesday's massive defeat was a bad result for May, it could prove to be a good result for the near-term outlook for the economy and the pound, said Paul Dales, chief UK economist at Capital Economics.
"This defeat surely means PM May's deal is dead. Even if May tries to resurrect it by stating by Monday 21st that her Plan B is to seek more concessions from the EU on the time limited nature of the Irish backstop, the magnitude of the loss means the EU might see little point in as it is unlikely to sway enough MPs," he said.
With the EU ruling out reopening negotiations on the Withdrawal Agreement and May's conciliatory statement, Dales said this implies that the PM will change direction to try and find a resolution that Parliament supports, such as a softer Norway-plus style Brexit being agreed later this year.
"But most importantly the size of the defeat appears to reduce the chances of the UK leaving the EU without a deal on 29th March. After all, the overwhelming consensus against May's deal means Parliament may now be able to gain greater control of Brexit and work towards a softer Brexit and/or a second referendum, which would almost certainly require the Article 50 negotiating period to be extended beyond 29th March."
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