AXA IM's David Page - UK reaction: PM May loses 3rd vote on Withdrawal Agreement

David Page, Senior Economist at AXA Investment Managers, comments on the rejection of the Withdrawal Agreement:

• Government loses 3rd attempt to pass Withdrawal Agreement by 58 votes, 286-344.
• Next steps Monday’s “indicative votes” as Parliament seeks a consensus.
• Constitutional crisis threatens if Parliament coalesces on a majority for something that government will not support.
• With deadline of 12 April looming, risks of a “no deal” exit are rising.
• We continue to expect the UK to avoid a “no deal” exit but see this through a long extension with a rising risk of a General Election.
• Financial markets reacted to the increased prospect of “no deal”.

Parliament has just rejected the government’s negotiated Withdrawal Agreement by 286-344, a loss of 58. This loss was much less than the 230 votes that the government lost at the first attempt (in January) and the 149 earlier this month. Nevertheless, it was still a loss and formally takes the possibility of an automatic EU extension of Article 50 to 22 May off the table.

The Brexit process now moves onto Monday’s second round of indicative votes. One of the things that Prime Minister May can now claim is that her deal has attracted more support (286 votes) than the other options (including the confirmatory referendum at 268 votes and customs union at 265). This may not be the case after Monday and it will be interesting to see whether Ken Clarke’s customs union option, which lost by just 8 votes (with large abstentions) could garner an overall majority. But, it is not clear that it will. Nor is it in anyway obvious that the government would support a clear majority from Parliament (for example, on a customs union) even if it emerged. possibility of government choosing to ignore the direction of Parliament threatens a constitutional crisis. And the risk of the Brexit process dissolving into a General Election and/or referendum appears to be rising.

Prime Minister May stated after the loss that the 12 April deadline was closing in, but that government would continue to seek the “orderly Brexit” that voters instructed. This suggests that she will now prepare to request a longer extension from the EU. Whether EU members will grant such an extension is unknown and in part depends upon what new approach such an extension might illicit from the UK. With the UK government voting three times to avoid a “no deal” Brexit, PM May suggesting the government would seek to avoid it, the EU keen to avoid a “no deal”, and ultimately Parliament having a unilateral ability to stop a “no deal” Brexit (through revoke), if all else fails we continue to think the UK will avoid a “no deal”. Albeit that it is the default outcome of a process that, for now, comes to an end in two weeks’ time. However, the risks of such an outcome are rising and the unprecedented nature of the UK political crisis morphing into a constitutional crisis increases the uncertainty of the outlook, and the risks of unintended outcomes.

This appeared to be sterling’s conclusion as it dropped below $1.30 to the US dollar, the lowest in 18-days, down 2.5% in just over two weeks (EURGBP rose to £0.856). Gilts also gained on the outcome, 10-year yields instantly dropping 5bps to 0.9%, before retracing to 1.00% (2-year yields similarly volatile are now 3bps lower at 0.63%).