January 16, 2019 / 11:13 AM / a month ago

Breakingviews - Markets point to way out of Brexit impasse

A shares trader checks his trading systems at the start of the trading session the day after the Brexit deal vote of the British parliament at the stock exchange in Frankfurt, Germany, January 16, 2019. REUTERS/Kai Pfaffenbach

LONDON (Reuters Breakingviews) - Financial markets are showing Theresa May that there is a way out of her Brexit impasse. The pound rose and stocks were stable after the prime minister’s historic parliamentary defeat on Tuesday evening, defying earlier predictions by politicians of a crash. If May survives, a softer Brexit or second referendum have become more likely. Investors’ relative calm contrasts with the political confusion.

Nobody expected May’s Brexit deal to secure a majority. Nevertheless, the scale of the defeat - the worst for a British government in modern history - was startling. In the end, 432 lawmakers, including more than a third of the prime minister’s Conservative party, voted against the agreement.

It’s very unlikely the deal can be rescued. Though May could ask the European Union for concessions, it’s hard to see what changes could reverse such massive opposition. Besides, any tweaks designed to appease her eurosceptic critics would further alienate opponents of a hard Brexit - and vice versa.

Before the vote, some politicians predicted that a defeat would frighten investors, thus putting pressure on parliament to reluctantly support May. That’s what happened in 2008 when the U.S. House of Representatives backed a bank bailout package after initially rejecting it. The analogy was always flawed, however, because the alternatives to May’s deal include reversing the Brexit decision, not just a chaotic exit.

Investors are now signalling that the former is more likely than the latter. The pound jumped 1.4 percent against the U.S. dollar immediately after the result was announced on Tuesday. The FTSE 250 Index of UK mid-cap stocks, which are more vulnerable than larger peers to a domestic economic shock, was broadly flat on Wednesday morning.

True, the British currency remains much weaker than before the 2016 referendum. And investors have badly misjudged the country’s political direction before. Though the majority of parliamentarians opposes Britain crashing out of the EU without a deal on March 29, they still have just 72 days to come up with a viable alternative. Investors are also assuming May’s government will survive a no confidence vote on Wednesday, reducing the chances that Labour party leader Jeremy Corbyn takes over. Nevertheless, financial markets are displaying a sense of direction which is lacking in Westminster.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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