Last night the UK parliament voted on a series of amendments to the Brexit Bill. The ultimate goal was to try and answer the question that the EU has posed for the past two years: ‘What do you actually want?’.
And, a resounding answer came back: ‘Something else’. It’s enough to make your head hurt.
What was actually decided?
Parliament knows what it wants:
- To leave
- Avoid a No-Deal Brexit –although won’t absolutely commit to that
- An alternative to the indefinite Irish Backstop
So it sent the Prime Minister back to Brussels to re-open negotiations, but it didn’t take long for the EU’s response – it was ‘no’.
There might be some room for some aesthetic concessions, but that’s about it.
Does a No-Deal look more likely?
On the margin, we’d have to say yes. The Cooper amendment, which effectively gave Parliament a veto on No-Deal, was defeated – even if a non-binding resolution, which isn’t the technical term, did pass.
Curiously, the UK market’s didn’t react. The most interesting part of the last 24 hours was that the market didn’t fall. Sterling is all of 50 basis points weaker than it was at 6pm on Tuesday night. The FTSE 100 has rallied. Hardly the stuff of a disaster.
It’s important that we take a step back and review our own assumptions on Brexit.
- That no-deal is negative for the UK and to a lesser extent for the EU
- That financial markets will perceive a no-deal as negative for the UK.
- That financial markets aren’t currently fully pricing in any particular scenario. So any clarity or even change in probabilities could prompt a repricing of UK assets, notably sterling.
- That no-deal probably won’t happen, but you wouldn’t want to bet your life on it
On that basis, if no-deal looks more likely today than yesterday, then perhaps we should have expected a sharper move in UK markets.
What is really going on?
There are a few dynamics at play here. The first thing to admit is we aren’t sure, but neither is anyone else. Here are a few possibilities.
- Our logic is sound – Except that the market believes the probabilities haven’t really changed. In this world. this is the proper negotiation and it’ll end with a brief delay to Brexit and some unspecified resolution will arrive (maybe driven by ‘technology’)
- Financial markets just can’t decide – So they do nothing – more or less.
- There are other issues going on – One theory put forward by a columnist was that a show of Tory unity, however short-lived, reduced the probability of a Corbyn premiership. I personally struggle with this argument, even if many market participants see Corbyn as a greater threat to UK financial assets
- Our logic is wrong – Markets don’t think no-deal will be that bad, it’s all priced in and moving closer to a more certain outcome that’s marginally positive.
- Markets are simply wrong – It’s a problem and they should be freaking out.
- Something else entirely
What do we do about it?
We believe the UK portfolios are quite balanced as far as Brexit is concerned and we don’t want to take a more aggressive view one way or another at this point.
We’ll keep monitoring events to try to gauge if probabilities have shifted enough for us to act. The short-term trade would probably be to sell some sterling, but focusing on the short-term over the long-term has never been our mandate – and we aren’t going to start now.
One other risk we probably face is that UK could do significantly better than global equities – but that’s always been the case. It’s just that UK equities look cheaper than they have for a while. It’s something that we’re debating for the next rebalancing.