What has happened?

 

There have been two significant further twists in the Brexit saga in recent days.

 

First, on Tuesday night the UK Prime Minister Theresa May announced, she would seek a further – unspecified, but short – delay to Brexit. Mrs. May added that she wanted to work with Labour leader Jeremy Corbyn to agree on one or a number of options and that she “stands ready” to seek compromise via whatever Brexit option the UK parliament could then back with a majority. Discussions with Mr. Corbyn and his team have already started although we might have to wait a few days to see any results.

 

Mrs. May’s speech signalled a path to solve the current Brexit gridlock in the Commons. Obviously, she is moving away from her own idea of a trade agreement with the EU (the current Withdrawal Agreement, WA) towards a softer Brexit that could win a majority in parliament. This might be focused around a customs union – a proposal for which was only defeated marginally by 3 votes on Monday this week (see our last Brexit memo for details). Mrs May is seemingly now prepared to back down on her long-defined “red lines” and is also apparently prepared to let parliament decide on the outcome if she and Mr. Corbyn can’t agree on how to move forward.

 

Second, the House of Commons has moved away from a focus on indicative votes (which all failed again in voting on Monday night) to consider instead the new Cooper/Letwin bill, which is designed to prevent a no-deal Brexit next week. This passed a reading in the House of Commons on Wednesday night (by one vote) and on Thursday afternoon was being debated by the upper house, the House of Lords, with an attempt to fast-track this into law over the next few days. The bill will instruct the prime minister to request an extension from the EU rather than go ahead with a hard Brexit. (The EU, of course, is under no obligation to agree to such an extension).

 

Deadlines nonetheless remain very tight. We have until next Wednesday before the emergency EU summit on April 10 and then two more days until the current Brexit deadline of April 12.

 

Market reaction

 

The signs of a cross-party compromise in order to solve the current Brexit gridlock in the Commons initially supported the pound as it rallied by close to +1% off its intraday lows after May’s comments on Tuesday. GBP proved volatile on Wednesday, at one point coming close to 1.32 vs. USD, but has fallen this afternoon on market concerns about the ability of the May/Corbyn talks to make a breakthrough. It is notable, however, that GBPUSD is so far moving in a relatively narrow range.

 

Our assessment

 

While PM May has not fully abandoned her own deal yet, her initiative could finally reduce the number of potential options if – and this is a very big “if” – she can agree with Mr. Corbyn on one or a limited range of options. Hence, the focus will now turn to the reaction from Labour, internal fighting in the government and wider Conservative party, the reaction of May’s coalition partners (DUP), and of course from the EU27.The positions of the key players can be summarized as follows:

  • Labour: Opposition leader Corbyn said in an initial reaction that he was “very happy” to meet with Mrs May and has been accompanied in the talks by the shadow Brexit secretary, Keith Starmer and Labour’s chief whip, Nick Brown. One question is to what extent Labour presses for a second referendum to ratify any future deal. 

  • Government/Conservative Party: There have been a number of negative comments from members of the European Research Group (ERG) but the worst is probably to come. Two junior ministers have resigned from the government but no senior ministers have left – yet. This could be the calm before the storm. 

  • DUP: The DUP criticised May’s “lamentable handling” of the negotiations, but said that they will continue to “judge all Brexit outcomes against our clear unionist principles”. That at least leaves open the possibility that the DUP would accept a solution that avoids a border between Northern Ireland and the rest of the UK.

  • EU27: The EU may be unwilling to grant another extension without forcing the UK to participate in EU elections, though we may learn more when EU commission President Juncker speaks to the European Parliament later today. EU Council President Tusk seemed to be encouraging patience from his own side. PM May obviously hopes to show the EU27 at the April 10 emergency summit that she has the backing of Parliament for a model for future relations and can pass the withdrawal agreement in Parliament by May 22 on that basis. The European elections of May 23-26 are likely to move centre stage again. If May continues to oppose UK participation in these elections, the EU may only agree to such a delay if the UK passes the withdrawal agreement before or on April 12. But if the UK agrees to participate in the European elections – and there are hints that Mrs. May might be prepared to do this – then the door could be opened to a longer extension, which may well be necessary. 

 

The risk remains that the new May approach falls apart quickly or is sustained for some time and still lead nowhere, given ongoing huge differences in parliament, including between proponents of soft Brexit and advocates of a second referendum. If this happened, cross-party cooperation could turn being a potential game-changer to a time squandering dead-end. Hardline Brexiteers could also try to block her approach by voting to bring her government down in a future confidence motion across the whole House of Commons. But if these obstacles can be overcome, May’s new proposal could create a path to resolution of the Brexit impasse based around a soft cross-party Brexit.

 

She may also feel that her approach holds out a sliver of hope that she could yet get a variant of her own plan through parliament in a runoff with other proposals with eventual (if reluctant) backing from hardline Brexiteers, who might otherwise face what they would view as Brexit-in-name-only (BRINO – see recent Brexit memos).

 

Above all, recent developments suggest a desire by Mrs.May not risk the No Deal exit that some Tory Brexiteer hardliners are hoping for, and that she will try meet the EU27 requirements for a Brexit delay, which is that the UK will adopt a political process intended to break the Brexit impasse.

 

Overall, therefore, we view recent developments as potentially positive for GBP/ UK risky assets but given the immense time pressures and the uncertainty involved, we would need to see signs of real progress before turning outright positive on UK assets and changing our scenarios. Remember: If Mrs. May is unable to present the EU with a credible plan on April 10, the EU may refuse her request for a further delay. We thus see the risk of a hard Brexit (that could come as soon as April 12) as unchanged at 25%.

 

Download this CIO Insights Memo as a pdf here.

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