Theresa May suffered another major humiliating defeat yesterday but Sterling is holding its ground-still above the 1.31 mark against the dollar. Clearly, something isn’t right here because the EU commissioner has warned a no deal Brexit as a high probability event
Theresa May, the British Prime Minister, suffered another humiliating defeat in the parliament yesterday. Her new deal, “legally binding”, was thrown out of the window by the British lawmakers. This created huge whipsaws for the Sterling-Dollar and Euro-Sterling pairs. To put things in perspective, Sterling-Dollar was trading at 1.3237 at 07:45 AM London time and dropped to 1.3010 at 11:15 AM. That is a move of over 200 pips in a matter of a few hours. The below chart shows the journey for Sterling-Dollar and Euro-Sterling in terms of their percentage gain as the events unfolded yesterday. The most dramatic change is in the one-month volatility for Sterling-Dollar which literally plunged yesterday.
So, how bad was the defeat for May?
The MPs were clear in the parliament. They had enough of Theresa May. Her set of tactics are no longer working. She has wasted two solid years and achieved nothing in this period. Thus, the result confirmed her failure at the Brexit vote by a margin of 149 votes. The devastating fact for her is that 75 Conservative MPs voted against her deal.
Later today, at 7 pm London time, the MPs will vote on whether they are going to take the scenario of a no deal Brexit off the table completely. Markets have certainly priced this as a positive outcome for this vote. This is the chief reason we did not see the intense sell off in sterling yesterday when the prime minister was being dealt a defeat. It could be true that market participants are completely oblivious. Perhaps, they are getting ahead of themselves. This is because if no-deal Brexit becomes the reality, it would bring an unprecedented catastrophe in the markets.
Voting for a no deal Brexit would open the door for an extension of Article 50. In other words, Brexit would be delayed. There are several issues with this. Firstly, there is no clarity how long the extension would be, and more importantly, whether the EU would be open to renegotiating.
The fact is that today’s no deal Brexit vote isn’t that simple. There are some critical elements that need to be taken care off before a no deal Brexit vote becomes a reality. Remember, the EU also needs to agree with such an outcome, and we know that they are playing hardball with the UK, making sure the UK values any concession it gets from the EU. Jean Claude Juncker, the EU Commissioner has made it clear that he is in no mood to re-open the negotiation process. He has also warned that a no deal Brexit is a high probability scenario, again something that the market is completely ignorant of. But anything coming out of politicians’ mouth should be taken with a pinch of salt. They mostly do not follow what they say.
The Same Hole Again
The issue with the delay of Brexit is that we could be looking at the same hole in a few weeks or months. There is no assurance that another few months are going to resolve the issue given that the politicians have not achieved anything in the past two years.
It is this particular factor which I think the market participants are largely undermining the current risk. Kicking the can down the road doesn’t really resolve anything for this matter.