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|16 January, 2019

Markets point to way out of Brexit impasse

Nobody expected May’s Brexit deal to secure a majority.

A broker looks at his computer screen on the dealing floor at ICAP in London, Britain January 3, 2018.

A broker looks at his computer screen on the dealing floor at ICAP in London, Britain January 3, 2018.

Reuters/Simon Dawson

LONDON - Financial markets are showing Theresa May that there is a way out of her Brexit impasse. The pound rose and stocks were stable after the prime minister’s historic parliamentary defeat on Tuesday evening, defying earlier predictions by politicians of a crash. If May survives, a softer Brexit or second referendum have become more likely. Investors’ relative calm contrasts with the political confusion.

Nobody expected May’s Brexit deal to secure a majority. Nevertheless, the scale of the defeat - the worst for a British government in modern history - was startling. In the end, 432 lawmakers, including more than a third of the prime minister’s Conservative party, voted against the agreement.

It’s very unlikely the deal can be rescued. Though May could ask the European Union for concessions, it’s hard to see what changes could reverse such massive opposition. Besides, any tweaks designed to appease her eurosceptic critics would further alienate opponents of a hard Brexit - and vice versa.

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Before the vote, some politicians predicted that a defeat would frighten investors, thus putting pressure on parliament to reluctantly support May. That’s what happened in 2008 when the U.S. House of Representatives backed a bank bailout package after initially rejecting it. The analogy was always flawed, however, because the alternatives to May’s deal include reversing the Brexit decision, not just a chaotic exit.

Investors are now signalling that the former is more likely than the latter. The pound jumped 1.4 percent against the U.S. dollar immediately after the result was announced on Tuesday. The FTSE 250 Index of UK mid-cap stocks, which are more vulnerable than larger peers to a domestic economic shock, was broadly flat on Wednesday morning.

True, the British currency remains much weaker than before the 2016 referendum. And investors have badly misjudged the country’s political direction before. Though the majority of parliamentarians opposes Britain crashing out of the EU without a deal on March 29, they still have just 72 days to come up with a viable alternative. Investors are also assuming May’s government will survive a no confidence vote on Wednesday, reducing the chances that Labour party leader Jeremy Corbyn takes over. Nevertheless, financial markets are displaying a sense of direction which is lacking in Westminster.

CONTEXT NEWS

- British Prime Minister Theresa May lost the parliamentary vote on her withdrawal agreement with the European Union by 432 votes to 202 on Jan. 15, the biggest defeat for a ruling party since 1864. Some 118 parliamentarians in May’s Conservative party voted against the agreement, out of a total of 317.

- Opposition Labour party leader Jeremy Corbyn called a vote of no confidence in May’s government after the defeat, which is expected to be at 1900 GMT on Jan. 16.

- Britain is due to leave the EU on March 29.

- Sterling fell more than 1.3 percent before the parliamentary vote on Jan. 15 to just below $1.27, but appreciated to $1.2823 afterwards. It strengthened slightly to $1.288 by 0922 GMT on Jan. 16.

(Editing by Neil Unmack, Bob Cervi and Karen Kwok)

© Reuters News 2019

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