Impact of today’s amendments to Brexit process

Brad Holland

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As we expected, this week has seen a lot of heavy political posturing as the March 29th Article 50 deadline approaches.

Prior to tonight’s votes, this deadline would either lead Britain into a transition period for negotiating the future trading relationship with the EU or would lead Britain to crash out without a deal, resulting in World Trade Organisation (WTO) tariffs on UK-EU trade.

Today’s amendment vote effectively endorsed the plan put forward on Tuesday 26th by Prime Minister Theresa May. The likely outcome will be to rule out the possibility of crashing out on March 29th, while still leaving open the possibility of a deal passing parliament on March 12th. So, what does the plan involve:

  • On or before 12th March, the refined Withdrawal Bill to be presented by the Prime Minister, for a meaningful vote.
  • If the Withdrawal Bill is rejected, by 13th March MPs will vote on whether or not to remove the possibility of a no-deal Brexit.
  • Finally, on the assumption that a no-deal scenario is ruled out, a further vote will be offered by 14th March, which would endorse an extension of the Article 50 deadline so that further negotiations can occur between the UK and EU.  The EU has already indicated it would agree to any such request.

The Prime Minister’s strategy is that she will secure enough cross-party support for the refined Withdrawal Bill to pass the House of Commons on 12th March. But if we get into an extension and a deal is still not forthcoming, the risk of market unfriendly political events remains heightened.

What does it mean for the political landscape?

First, it removes some leverage over the EU, as the EU now knows that it will be collecting its divorce payments and keeping the UK tied to its manufacturing regulatory environment. However, this leverage has had minimal effectiveness in helping to secure a renegotiation of the withdrawal agreement so far.

Second, it adds pressure on the extreme Brexiteers to accept Theresa May’s revised deal when it is proposed. That deal is expected to provide legal assurances by the EU that the UK will not be permanently trapped in a Northern-Ireland backstop situation. This pressure is heightened further by Labour’s decision to back a second referendum. Eurosceptics are likely to fear a second referendum more than they would fear the unlikely event of the EU holding the UK hostage in perpetual back-stop. Jacob-Rees-Mogg, one of the most out-spoken Brexiteers, has already backed down from his demands over the backstop and is expected to back the deal on the 12th March.

Third, it gives Labour MPs more freedom to back the Prime Minister’s deal.  Although the Labour membership overwhelmingly support a second referendum, 70% of sitting Labour MPs come from pro-Brexit constituencies. With a no-deal scenario all but ruled out, and with Labour policy now at odds with their electorate, these MPs have the political cover to “cross the floor” and vote with the Government.

In summary, today’s developments add to other recent political posturing to support Nutmeg’s base-case that a deal will be done to exit the EU – if not by 29th March, then after a relatively brief extension of the Article 50 deadline. Nutmeg’s actively managed portfolios have long been positioned for such an outcome. But we continue to monitor the volatile situation on behalf of our customers, because political miscalculations still have the potential to cause adverse financial market outcomes.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.

Brad Holland
Brad is Nutmeg’s director of investment strategy. A veteran – 28 years at last count – in financial markets, he started his career as a professional economist at the Australian Reserve Bank. He now specialises in economic and financial market strategy within investment management. Brad studied post-graduate quantitative economics at the University of Queensland, Australia. Despite living in London for 20 years now as a naturalised British citizen, he’s still not quite ready to support England-v-Wallabies.

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