BNY Mellon: Brexit: What Happens Now?

9 jan 2019

By Simon Derrick, Chief Currency Strategist, BNY Mellon

Over the course of the past few weeks GBP has followed its fairly standard pattern of seeing a decline in volatility during periods when Parliament is in recess.

With Parliament now back and the “meaningful vote” on the government’s negotiated withdrawal deal with the EU reportedly set for next Tuesday, however, it seems likely that the focus will shift back onto how events will unfold in the UK over the next three months.

Here’s our updated Brexit guide.

Realized Volatility and Parliamentary Recesses

Each Easter, summer and Christmas recess of the House of Commons since the EU referendum in 2016 has seen a decline in GBP/USD 21-day realized volatility, measured on an open/high/low/close basis.

Excluding the Easter 2017 recess, a significant rise in realized volatility has emerged in the weeks after Parliament resumes sitting (see chart below).

What happened yesterday?

Conservative MP Nicky Morgan and Labour's Yvette Cooper tabled an amendment to the Finance Bill which would limit the government's spending powers in the event of the UK leaving the EU without a deal. This amendment passed by 303 votes to 296 (with about 20 Conservative MPs backing the new clause). The FT quotes an unnamed minister as saying that the amendment is “not desirable” but notes it will be an “inconvenience” rather than something more serious. The minister adds: “It would not stop the government collecting tax. It implies minor technical changes.”

What happens now?

January 15: Government sources told the BBC the vote on the deal - which will come at the end of five days of debate - is set for next Tuesday, assuming MPs agree to sit this Friday.

January 21: If there is no deal by this date the UK government must make a statement within five days on what it plans to do, according to the European Union (Withdrawal) Act of 2018.

The Current Situation

1: The default outcome from triggering Article 50 is a no-deal Brexit on March 29. 
Although the vote in Parliament yesterday highlights the strength of opposition to this outcome (similar amendments are planned in the weeks ahead), MPs cannot actually stop this happening unless the vote in favour of an alternative outcome.

2: Should MPs wish to avoid this the most straightforward option is for Parliament to agree upon the already negotiated deal. However, there are 313 active lawmakers on the opposition benches and 10 DUP MPs that remain opposed to the deal while 117 Conservative MPs registered their lack of confidence in Theresa May just under a month ago.

Given there are 639 active lawmakers in Parliament, it appears the PM has a substantial task ahead in getting the 320 votes she would need to get Parliament’s approval to proceed. 


3: While it is possible that the EU could provide some additional assurances or reopen negotiations, nothing that emerged since last month’s EU summit indicates that this should be counted on.

4: There’s been some discussion of support for a Norway-style membership of the European Free Trade Association. However, questions have been raised by the BOE and others about the feasibility of such a deal. 


5: It is possible that a vote of no confidence in the government could succeed but this currently seems unlikely given the numbers in Parliament. While a general election is the stated aim of the Labour party, there has been no move so far to call such a vote.

6: A second referendum can only happen if the government brings new legislation to hold one and secures the approval of a majority of MPs.

While it’s thought there might be sufficient support at present for a second referendum should the Labour Party come out in support of one, it isn’t clear that the government would be willing to schedule such a vote at present. 


Polling

A YouGov poll was taken between December 21 and January 4 on the question: “From what you have heard about the Government’s proposed Brexit deal, do you want your MP to vote for or against the deal?” 25% of those surveyed said they wanted their MP to vote for the deal while 40% said they would want their MP to vote against the deal.

The same survey showed support for the Conservative party (were an election to be held now) at 40% and Labour on 34%.

Those surveyed were also asked: “Please imagine that a Brexit deal passes with the support of most Conservative MPs and most Labour MPs. The Liberal Democrats [SCOTLAND: "and the SNP", WALES: "and Plaid Cymru"] oppose it. How would you vote at the next election?” 42% replied they would vote Conservative while 26% said Labour.

The What UK Thinks: EURef2 Poll of Polls (based on the average share of the vote for ‘Leave’ and ‘Remain’ in the six most recent polls of how people would vote if they were to be presented once again with the choice of either leaving the EU or remaining a member) shows 53% in favor of remain against 47% for leaving the EU.

Article 50

On December 10, 2018, the European Court of Justice ruled that the UK can unilaterally revoke its withdrawal notification made under Article 50 of the Treaty on European Union.

The Daily Telegraph reported yesterday (citing three separate EU sources) that UK officials have been “putting out feelers” and “testing the waters” on an Article 50 extension.

When asked about the report in The Daily Telegraph, a spokesperson for UK Prime Minister Theresa May’s Downing Street office told the FT: “There are people in the EU who are discussing this issue but it’s not the position of the British government. We will not be extending Article 50.”

Brexit Secretary Stephen Barclay told Sky News: "The government's policy is clear on this, the prime minister has said it on many an occasion: We are leaving the European Union on the 29th of March. We are not looking to extend."

German Foreign Minister Heiko Maas said yesterday: “I wouldn't really want to think about the possibility of extending Article 50 here and now. I don't think this is what we ought to focus on today.”

Positioning