A summary of what went on.
It’s fair to say it’s been a long 2 years since June 2016. As was expected by many sceptics, the proposed deal that was hashed together by Theresa May’s government was comfortably rejected by a whole 230 votes which is now a record margin on any vote for an operating government and more importantly regarding sentiment – the biggest humiliation.
The rejection was obviously, by definition, cross-party with Labour MPs and Northern Ireland’s Democratic Unionists and 118 Tory MPs rebelling against the option on the table for the UK’s withdrawal from the European Union on 29 March.
For many MPs (and their constituents), a main source of discontent has been the complicated situation with Northern Ireland and the terribly named ‘backstop’. The simple summary is after Brexit has been finalised and legally concluded, Northern Ireland and the Republic of Ireland would technically be in different customs unions. The idea was a physical border between the two countries but has been categorically rejected by both sides. A ‘backstop’ will be implemented only if no alternative to a hard border can be found. The hard border is negative as it would return divisions and a barrier (literally) to a previously segregated Ireland. Assurances that this would only be a temporary situation have not convinced many MPs or commentators.
The next question most people have is “why is this important?” A valid question. An orderly, dignified and competent exit from the European Union is essential given the serious implications of Brexit for the UK economy, global economy, jobs, the Pound (£) and financial markets.
Interestingly, currency traders reacted to the decision by buying the pound and it went up to 1.13 against the euro. This was essentially financially markets saying they didn’t believe the UK would leave the EU via expecting a second referendum. Failing that, they expect a soft(er) Brexit that the one proposed – all viewed as more favourable for business and financial markets.
It’s fundamental whether you are a “Leaver” or “Remainer” to maintain a mutually beneficial trading relationship with Europe. The EU is our largest trading partner by far, responsible for 44% of our exports worth £274 billion as of 2017. UK companies already face bureaucracy as they try to comply with changes in trading rules, and a deal that both sides can would with would aid the transition.
Regardless of the hard talk by most hard Brexiteers a no-deal Brexit is a least-preferred outcome given the immediate economic damage that would ensue. Economists predict due to falling under trading rules from the WTO, tariffs and other barriers would severely hinder trade with Europe, for importers and exporters. If they haven’t planned already, and some have pledged to go, many European corporations and other international companies would move parts, if not all of their European operations to other countries within the EU. Mint of the big boys of the financial services industry have started to move administration and operations outside the UK and typically the sales and front-line staff move soon after.
If anyone knows in high value, sophisticated sales with knows new deals take time to negotiate and implement. This would be no different from leaving the EU. For UK importers and exporters, this unknown and delay is, at best, a significant disadvantage to their EU and Asian competitors. The immediate fallout of know permanent trade deals which means the EU will insist that Britain must still pay its share of agreed EU expenditure, leaving political and diplomatic relations further intensified.
What was the next move?
The Labour leader Jeremy Corbyn tabled a vote of no confidence against the prime minister, which she just about survived. Rumours were understandably swirling of her pending resignation and a General Election. It seems she clung on due to the simple fact that is no natural or credible alternative. Labour have echoed their support for a second referendum and a need at all costs to avoid a “no deal” exit, something which was seen as impossible before their leader finally launched a no-confidence motion. Theresa May opened up cross-party too but Corbyn (a live long Brexiteer) still refuses to engage in talks despite his party calling for him to do so.
Now, Theresa May has three working days to come up with a second option. As it stands, there is no revolutionary set of options or direction. The PM remains insistent that the only choice to be entertained is between her deal (now voted down) or a no deal Brexit. That may have been a reasonable negotiating position before last week’s vote.
It is highly likely that Plan B is to request an extension of Article 50 beyond March 29 in order to give extra time to negotiate a deal acceptable to the majority of MPs in parliament. There is also the option to withdraw Article 50 and the entire Brexit process – favoured by many. Experts have said a 2nd referendum could take around 7 months to plan and execute when taking into consideration MP’s summer holidays.
How does it affect us?
A continuing chaotic Brexit withdrawal fuels concerns around foreign trade, economic growth, jobs and investment in Britain by companies based both in the UK and overseas. Yet to be seen lagging economic data to be released will provide more objective evidence on this thinking.
Pre-vote sterling fell below $1.2700 but rallied back up to $1.2850. Pound/euro spiked significantly about 1.13 and held for the rest of the week. FTSE 100 futures fell below 6,880 post-vote results after initially moving up
The aftermath of the vote has the increased calls of either a ‘soft’ Brexit or no Brexit. The FTSE 100 reacted by being down over 40 points to 6,850, largely as a result of the rebound in sterling vs the week’s lows. Overseas earners are down as the stronger pound means profits made in dollars or other currencies are worth less when translated back into sterling, most companies’ reporting currency.
Implications for the pound and for UK-listed equities from the range of Brexit outcomes could be more extreme. In the possible event that Brexit does not happen, the bullish of all bulls predict sterling could trade above $1.40 again. If progress to finish with a ‘hard’ Brexit, the pound could move towards parity with the dollar and the euro
Smaller companies, retail investors and holiday goers especially are likely to track the fate of sterling as their prospects depend very much on a strong UK economy and favourable Brexit outcome.