Brexitension ahead

It’s becoming more like the Encyclopedia Britannica. Each month, a new volume extends the collection, adding new things to the Brexit topic. This week, we’ll probably add the term ‘Brextension’ to the Brexit terminology. As things stand, the British Prime Minister Theresa May faces an uphill battle in getting her deal through Parliament. So far, news flow has been disappointing with limited progress made on strengthening the UK’s position over the Northern Ireland backstop. While it is possible that some Brexiteers may vote for the deal to avoid an extension to Article 50, market watchers think it likely that the vote fails to get through. More likely, Pro-EU MPs may see this as an opportunity to defeat May’s deal and wrangle a closer relationship with the EU over the coming months.

Passage of the Withdrawal Agreement likely will require Attorney General Geoffrey Cox to issue a legal opinion that the ‘Backstop’ is not legally binding indefinitely and the DUP and ERG to support his finding. The Telegraph reported on March 6 that May’s Cabinet expects her Brexit deal to be defeated by up to 100 votes this week. If the Withdrawal Agreement does not pass, the House of Commons will vote on a ‘no-deal Brexit’ on March 13. A ‘No-deal’ will likely to be blocked by MPs, leading to a vote on and extension of A50 the next day. This appears the most likely outcome priced in by markets.

The pound is likely to rally if the deal is accepted. If the deal is rejected again, however, the Prime Minister has said that there would be a vote on the 13th on whether to accept a ‘no deal’ Brexit and, if not, then another on the 14th on whether Article 50 should be extended. Parliament has previously indicated that a majority of lawmakers do not favor a ‘no deal’ Brexit so logically in this scenario MPs would be expected to vote to delay Brexit. However, nothing can be taken for granted and the range of political options above will keep markets on edge.

A key unknown in the process is what amendments to the government’s motions will be put forward, which will be selected by the Speaker and their respective support in the House of Commons. That could be particularly important for the vote on the 14th, as it still seems unclear in parliament what type of future relationship with the EU is preferred. Any vote to extend Article 50 would also have to be agreed by the EU-27, most likely at the EU summit the following week. According to Barclays Capital estimates, the pound will rally 1.5 percent in the event of the Withdrawal Agreement passage.

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