Market Watch: Brexit Special

By Evan Lucas, Chief Market Strategist – InvestSMART

Chief Market Strategist Evan Lucas breaks down the upcoming Brexit vote.

Upcoming events

Source: Reuters

Breaking down Brexit scenarios

December 11, 2018 will mark the pinnacle of the Brexit timetable. Since the triggering of Article 50 (the law a country triggers when it requests to leave the European Union), markets, economies and the general population have been waiting to see if the Commons would actually vote through any agreement put forward by the EU. 

In this special, I would like to discuss what is likely to happen, along with the likely outcomes in the aftermath of Tuesday’s vote:

  • Expectations are that the vote will fall on the first attempt, as the numbers are razor-thin, and Prime Minister Theresa May’s Coalition government has expressed its displeasure at the Withdrawal Agreement signed off with Brussels.
  • In terms of the numbers, 329 MPs need to agree to pass the agreement, which would constitute a majority. May has 289 Tory MPs, 10 DUP MPs, and then several other small parties supporting her government. 25 Tory MPs have already stated they don’t support the agreement, with all 10 DUP MPs sharing the same view. Something magical needs to happen between now and the vote for these MPs to change their minds.
  • Initially, we are likely to see discounts in the sterling (GBP) and the British stock market (FTSE). Current estimates are that the GBP will likely decline by 1-2 per cent, while the FTSE is expected to fall 5-7 per cent (keep in mind that BHP and Rio are listed in the UK).
  • January 21, 2019 becomes the back-stop vote for Brexit, and the consensus view here is that the vote will pass after five to six weeks of tweaks around the deal that most believe will be insignificant. However, if the vote was to fail again, then a ‘no deal’ fallout would become the most likely scenario, which would cause British and European markets to fall significantly. The reason for this is that the March 29 deadline would be too close to see changes made before Article 50 causes the UK to crash out.

The caveat is that Westminster is so unpredictable and so factional that although the current path described above appears the most likely outcome, conviction is lukewarm. This is why Brexit is the biggest risk event of this coming week, and one which could have wider ramifications for trade.