Markets react to rejection of UK-EU Withdrawal Agreement

EPA-EFE//FACUNDO ARRIZABALAGA

Markets react to rejection of UK-EU Withdrawal Agreement


Share on Facebook
Share on Twitter
Share on Google+
Share on LinkedIn
+

European markets reacted positively to the rejection of the EU-UK Withdrawal Agreement by the UK’s House of Commons on January 15 with the pan-European Stoxx 600 up 0.3% a day after the pact was voted down.

The crushing defeat of the Withdrawal Agreement bill by a 432 to 202 margin was the worst any British government since 1924. The defeat was anticipated but not the extent of the defeat was a surprise even for some of the pro-Brexit camp.

Counterintuitively, the pound surged against the euro after the vote as market players began speculating that the UK may call for a postponement of the UK’s exit date pending further negotiations, or even resort to a second referendum.

The downward trend for the pound follows its trajectory from 2018 when it lost 7% of its value against the euro.

Hedge fund manager Crispin Odey – a major donor to the Brexit campaign – told the BBC that he expects Brexit will be disrupted and he is positioning for the pound to rally. The Financial Times, however, believes the pound has limited scope for a rally that would exceed 5%, far below the cumulative 15% drop since 2016.

The default legal position at this point is that the UK will leave the EU on March 29 with or without a Withdrawal Agreement. With only 71 days to go before the withdrawal deadline – and only 46 parliamentary working days – there seems to be no alignment by either side as to what should happen next.

Leave supporters’ preferences range from a Canada plus agreement, which would see tariffs on goods traded between the UK and EU remain duty-free, to hardline “no deal” supporters that actively push for Britain to leave the bloc without having a backstop agreement in place for the status of Northern Ireland.

The Europhile camp ranges from advocates of a “People’s Vote”, essentially a second Brexit referendum, to a Norway-type regime that would see the United Kingdom remain within European Economic Area and the European Free Trade Association which gives it full access to the EU single market.

From retail to logistics, the British economy seems unprepared for a cliff-edge drop out of the Single Market and the Customs Union, although the government claims to be on top of the situation. Most analysts believe that the prospect of a disorderly Brexit will be averted, even as the President of the European Commission, Jean-Claude Juncker, warned that Tuesday’s vote makes this scenario more likely – a sentiment that was repeated by the European Commission’s chief Brexit negotiator, Michel Barnier January 16.

UK stocks and sovereign bond yields reacted negatively on Wednesday, reflecting uncertainty for the future of the British economy. The UK’s benchmark 10-year bond climbed 3 basis points to 1.29%, while rating agency Moody’s warned that the failure to adopt the Withdrawal Agreement extends the period of uncertainty.

Share on Facebook
Share on Twitter
Share on Google+
Share on LinkedIn
+