BNY Mellon: UK Weekend Update

25 mrt 2019

By Simon Derrick, Chief Currency Strategist

• Talk of attempt to oust UK PM this weekend.
• Meaningful vote unlikely at start of week. Indicative votes likely.
• Unknown whether majority in favour of any one course of action.

What’s happening today?

There have been reports that UK Prime Minister Theresa May has called an emergency meeting with leading Eurosceptic Conservative MPs from 1500 GMT today. (@robpowellnews) We will provide a further update should something significant emerge.

Is the UK’s Prime Minister about to be ousted from her position?

Many of the UK’s Sunday newspapers ran front page stories today about apparent attempts over the weekend to oust Theresa May from her position as head of the Conservative Party and, hence, as PM. However, some pushback against a Cabinet coup did emerge on Sunday morning.

Will the withdrawal deal come to a meaningful vote on Monday or Tuesday?

At present this looks unlikely. On Friday the PM indicated she would not put the deal to a third vote in parliament, unless it had “sufficient support” among MPs. On Sunday Chancellor Philip Hammond said it was “looking very difficult to bring together a majority” for the deal.

Will there be a series of indicative votes on what Parliament might be able to support?

Very likely. The government has already promised to provide indicative votes while an amendment is to be put to the House of Commons tomorrow proposing the same thing.

Is there a majority in Parliament for any one course of action?

Unknown but possibly not. If there were a majority then it would either likely be around a softer version of Brexit or linking approving the already negotiated deal with a second referendum.

Chancellor Phillip Hammond noted on Sunday (when asked about a second referendum): “I’m not sure there’s a majority for it in the House, but it’s a perfectly coherent proposition that deserves to be considered on the list [of options” (@faisalislam)

How might Conservative Brexiters react?

Brexit minister Stephen Barclay made it clear on Sunday morning that should MP’s vote in favour of an option that is at odds with the Conservative Party manifesto, then "the risk of a general election increases”. Other reports indicate that Brexiters could react poorly to either the promise of a second referendum or a softer Brexit.

Could the Labour Party leadership bring another confidence vote in the government?

Yes. A week ago Labour leader Jeremy Corbyn said he believed the government would be defeated again (if the withdrawal deal were brought to a meaningful vote) “and then I think a confidence motion would be appropriate”.  He did not mention whether a confidence vote would be brought if the deal were not brought to a meaningful vote.

Could the government lose a confidence motion?

The are 313 active lawmakers on the Conservative benches. In addition there are 10 members of the DUP which supports the government by a confidence and supply agreement. as well as the 11 members of the newly formed Independent Group of MPs.

Active Labour lawmakers combined with MPs from the SNP, Plaid Cymru, Green Party, Liberal Democrats and the remainder of the independent MPs number 304. It would therefore likely take 15 rebel Conservative MPs to actually vote against the government to bring it down.

What do the opinion polls say?

Recent polling has primarily show the Conservative Party between 2 and 10 percentage points ahead of Labour. However, one recent poll did give the Conservatives a 4 percentage point deficit.

GBP and general elections

GBP has tended to put in an improved performance when the Conservative Party has done relatively better in opinion polls in the run up to general elections (although this wasn't particularly true in 2005). Interestingly, in 1997 this happened even though there was no realistic chance of a Conservative victory emerging. This suggests that relative shifts in polling in the run up to an election can have an impact on GBP even if the absolute gap between the two main parties remains substantial.

The market has tended to dislike uncertainty (with 2010 providing the best example of this).

There has been a tendency towards lower volatility in the run up to the election with the only real exception being 2010.

The threat of a coalition in 2010 was treated poorly by the market. This came despite the fact that GBP remained relatively stable during the period of the 1974 Labour minority government and rallied during the time of the Lib/Lab pact in the late 1970s.

The price action on GBP in the run up to the election is not necessarily a guide to what happens afterwards. GBP performed well between 2010 and 2015 during the lifetime of the coalition government. GBP was also consistently strong through most of the period of the three Labour governments between 1997 and 2010.However, it is also worth recalling that GBP suffered badly in the aftermath of the October 1974 vote.