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May's deal defeated - what is next for Brexit?

13 March 2019

Jonathan Marriott – Chief Investment Officer

Last week Attorney General Geoffrey Cox, referring to his opinion on the Brexit deal in Parliament, said “it has become known as Cox’s Codpiece, what I am concerned to ensure is that what is inside the codpiece is in full working order”. Yesterday, the Prime Minister's Brexit deal was rejected by Parliament for the second time since January, this time by 149 votes versus the previous 230-vote loss.

As a result, the voting is set to continue and the potential outcomes are infinite and dependent on many layers of approval, all of which could completely change the course of Brexit. Our expectation is that today MPs will vote on a no deal Brexit, which they are likely to reject. On that basis, tomorrow will see another vote in Parliament to request an extension. Without any option, we anticipate that this is likely to pass. The Prime Minister will then have to request an extension to Article 50 that all the other member states will need to approve. At such a point in time, the European Union (EU) may ask why we require an extension. If it is for a general election or another referendum they are more likely to agree; however, if it is to allow for further negotiations, it is possible that they will refuse on the basis that they have given all the time they are prepared to do so. Alternatively, it is possible that the EU demand a price; I have seen a suggestion of as much as a billion pounds a month. If the EU denied an extension, it may be shooting itself in the foot economically but that cannot be ruled out. As ever with this process, delay and polarisation seems the most likely outcome. Companies holding back on investment are awaiting clarity and the UK economy will suffer. 

Following May's trip to Strasbourg on Monday to negotiate new wording around the deal, the pound moved up. As the deal subsequently fell apart, initially with Cox’s opinion followed by the DUP and the ERG's rejection, the pound retreated. Elsewhere, monthly economic growth and manufacturing numbers were better than expected, but these were largely ignored amongst the noise. As the pound strengthened, the FTSE 100 Index fell. This then reversed as the pound fell further. In the end the market was largely unchanged. 

So what next? The deal on the table has failed and with just 16 days to go until Brexit, a delay seems likely. By the time we have two more days of debate in Parliament, we will have just 14 days to come up with a way forward. The outcome is as unclear and unpredictable as ever. A delay of anything up to two years, a second referendum or an election are all possible outcomes. In the midst of this, Philip Hammond today will deliver his spring statement, which is likely to be the least important event in Westminster. For now, the Prime Minister will be looking for a fig leaf to cover up for the failings so far.