Brexit: what happened this summer and what's next for the markets
Madison Faller analyses how the British pound and the euro will be affected by the Brexit fallout
The stage seems set for the next dramatic act in the Brexit saga. Over the summer Theresa May stepped down as the UK’s prime minister after years of painstaking political gridlock, and Boris Johnson took the helm a few weeks later. So far, Johnson has taken a hard line on his campaign promise to deliver Brexit by the October 31 deadline “come what may”.
However, UK policymakers wasted no time after returning from their summer recess, passing legislation that opposes a no-deal outcome just before Parliament was prorogued (in other words, suspended) until the Queen’s Speech on October 14.
When it comes to markets, it looks like more of a bumpy ride ahead.
The new law calls for the prime minister to request an extension until January 31, 2020 if no deal is agreed with the European Union by October 19. It remains to be seen how Mr Johnson will take action in response to this recently passed no-deal legislation. He has already motioned for a general election twice, both of which failed amid lack of parliamentary support.
With so many twists and turns, our view has changed over time. In particular, the probability of a no-deal Brexit outcome has oscillated dramatically since things started to heat up towards the end of last year. After years of negotiations and two extended deadlines, the probability of the UK leaving the EU without a deal seemed pretty low up until recently.
However, as Mr Johnson took the helm, maintained his hardline stance to leave the EU, and shortened the time Parliament had to act, that risk seemed to escalate meaningfully. But as policymakers successfully passed legislation against a no-deal outcome, such a fate on October 31 now seems less likely.
The next major catalyst on the agenda is an EU summit on October 17. From here, the most likely outcome appears to be a general election facilitated by an extension of Article 50. Such an election could also occur both after Brexit and within this calendar year. Only time will tell.
As for what’s next, Parliament will be back on October 14, an EU summit will follow in short order on October 17, and the time (according to the new bill) to request an extension expires on October 19. Mr Johnson has said he won’t request an extension at the summit, but given the recently passed no-deal legislation, it remains to be seen how he would get around the law. At different times along the way, the government could fall as a result of any vote of no confidence (assuming one is called). However, it’s not clear what would happen in that scenario, as there is little agreement on the construction of any administration that would replace it, even if temporarily.
When it comes to markets, it looks like more of a bumpy ride ahead. Since the Brexit referendum in 2016, sterling has been the main avenue by which investors have expressed their views on the outcome of the Brexit process. The initial sharp fall in the British pound was followed by a period of significant weakness, with today’s levels hovering around 2017 lows.
From here, the pound could swing rather dramatically depending on the outcome for Brexit. Because Sterling has weakened over the last few years, companies whose revenues are sourced from business abroad, but are listed within the UK, have outperformed those that have a more domestic focus. For those investors with a short-term investment horizon and lower risk tolerance, we suggest avoiding the volatility of UK markets, at least for now.
It’s worth noting that the Brexit process and outcome impacts the UK far more than it impacts the EU. Having said that, it's likely the euro would be affected in a no-deal scenario, as investors worry about any collateral damage around points of Brexit stress. However, we expect the impact on European-wide markets to be short-term and sentiment-driven, while any longer-term impacts will probably be insular to the UK.
Madison Faller is the Emea Markets Strategist for JP Morgan Private Bank
Updated: September 25, 2019 05:09 PM