Fixed Income Research & Macro Strategy (FIRMS) – 14 November 2018

  • 873 days after the referendum on 23rd June 2016, the British government announced yesterday that UK and EU negotiators had reached a draft agreement on the terms and conditions of i) the UK’s exit from the EU and ii) the outline of the UK’s future relationship with the EU beyond 29th March 2019.
  • The first hurdle which Prime Minister May faces is to convince her divided cabinet to sign off on this draft deal at a ministerial meeting scheduled for 14.00 (London time) today.
  • Theresa May will want to get a broad consensus from senior cabinet members for the draft agreement to improve the odds of the British Parliament voting in favour of the deal.
  • She already faces an uphill battle to convince a simple majority of the 650 members of the House of Commons to vote in favour of any draft deal, as we argued in Final Twist in Brexit Plot (14 September 2018).
  • While parliamentary arithmetics are complex, a majority of House of Commons members could realistically vote against such a deal, in our view.
  • In the event of the House of Commons voting against the deal, a number of possible scenarios would open up, including the government seeking a second popular referendum in which the British electorate would be asked to vote on whether to accept the deal, remain in the EU or leave the UK without a deal.
  • We argued in Final Twist in Brexit Plot (14 September 2018) that the odds of a second referendum had increased materially over the summer. If anything, those odds have increased further in the past two months, in our view.
  • Should the cabinet today approve the draft deal we would expect Sterling to extend its recent gains. However, the uncertainty of whether Parliament would vote in favour of such a deal, not to mention the underlying weakness of the UK economy and a “neutral” Bank of England monetary policy stance, would likely cap any Sterling upside, in our view.

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Ryan Littlestone

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