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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Please ensure you fully understand the risks involved.

Brexit deal passes the EU stage – what now?

Now that the EU has approved the UK withdrawal agreement, the focus moves back to the UK and the vote in Parliament.

UK
Source: Bloomberg

It looks like the Prime Minister Theresa May will push for a vote in Parliament on 11 or 12 December, with this vote preceded by a blitz of PR designed to ‘sell’ the deal to both the public and MPs of all parties. Her open letter to the nation in Sunday’s newspapers was the start of this. A measure of how keen she is to convince the country is seen in the reports of a possible head-to-head debate with Jeremy Corbyn on the subject, a remarkable move given how keen she was to avoid appearing on the debates prior to the 2017 election.

At present, however, the deal still looks unlikely to pass in Parliament. Too many MPs either viscerally dislike the deal, or are likely to vote it down as they follow party lines. Others argue that a renegotiation is possible, even at this late hour, but EU Commission president Juncker was very clear on this point at the Sunday press conference – no new deal is possible.

A common view has developed that if Parliament votes down the deal, then a situation analogous to the TARP vote in the US back in 2008 will follow. Markets, frightened by the prospect of the UK crashing out of the EU without a deal, will drop sharply, and this outbreak of panic will force Parliament to vote again and pass the deal. This view has merits, but I suspect it overstates the importance of Brexit to the wider world. Still, a run on sterling and UK bonds would concentrate minds, boosting the case for the deal to go through on a second try.

If the deal still fails to go through, we have a number of possible outcomes, as suggested by the Guardian:

  1. The PM resigns – it is her deal, so a second rejection would be an implicit rejection of her as PM. A different Tory leader may then emerge, with possible front runners being Michael Gove, Sajid Javid or perhaps Jeremy Hunt.
  2. No-confidence vote in the PM by Tory MPs – a failure to get the deal through leaves her vulnerable to such a vote, and she may not win if the deal has not been passed. A leadership contest develops, with similar front runners to point 1.
  3. A general election is called – the PM may choose to make an appeal in the ‘national interest’ and go to the country to get backing for the move. Such a move has a precedent, but not a good one. Heath’s general election in 1974 was based on ‘who governs Britain?’, and was an appeal to the nation, but he failed to win an overall majority and his government was replaced by a minority Labour one.
  4. Labour forces a no-confidence vote – if the DUP and/or some Conservative MPs fail to back the PM, then the government will be a minority one and open to a possible vote of no confidence. If Labour wins this, then the government falls, and, under the terms of the Fixed Term Parliament Act, a 14-day grace period ensues in which both sides may get a chance to form a government.
  5. A second referendum – a surge in support for this, such that a number of MPs back it, could yet see the country vote again, but the question here is whether the EU would give us the time for it. Officially unlikely, there have however been enough statements about the ‘tragedy’ of Brexit for the EU and how ‘no Brexit’ is the best deal for the EU to be open to such an idea.
  6. No deal – this takes us over the abyss, with potentially huge economic disruption. Amber Rudd (now back in Cabinet as Secretary of State for Work & Pensions) says Parliament will block a no deal Brexit, but she was noticeably light on the detail of how this would be accomplished.

It is not difficult to imagine the market reaction to all this. Sterling will slump, as will UK government bond yields and while this might be short-term positive for the FTSE 100, we would likely see more funds leave UK equities over the medium term.

Brexit

Find out what Brexit could mean for the markets and how a hard or a soft exit from the EU could affect traders.

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