Theresa May Brexit

The FTSE 100 was lower on Friday as the pound gained after the European Union granted the UK an extension on the article 50 deadline to leave the bloc. UK stocks were also weaker as European economic data put pressure on the euro.

EU leaders have agreed that Britain will depart the bloc on May 22 if UK MPs approve Prime Minister Theresa May’s divorce deal. The original departure date was March 29.

At a late night press conference, the Prime Minister made clear she intended to make another attempt to get her Brexit deal through the Commons. The so-called “meaningful vote” wil be the third attempt the Prime Minister will attempt to get her deal approved and could happen next week. Meanwhile, an epetition to revoke Article 50 has been signed by more than 3 million people.

If May succeeds, the EU leaders agreed to extend the Article 50 withdrawal process until May 22 to enable the government get the necessary legislation through Parliament. But if she fails to do so, the UK will have until April 12 to set out its next steps, with a longer extension on offer only if Britain takes part in European Parliament elections in May.

“Though the agreement with the EU – that Britain can extend the article 50 deadline until the day before European elections in May if MPs agree to the current Brexit proposal, or that it can submit a request for a longer delay until April 12 – boosted the pound, it fundamentally provided only a short reprieve as the country remains without a resolution about its future. Under the circumstances the markets will have no option but to remain volatile and dominated by Westminster headlines in the weeks to come,” said City Index analyst Fiona Cincotta. 

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Market Reaction

The pound moved up by a cent today to $1.32, but the UK currency has seen highs of above $1.33 in recent weeks as traders weighed up the chances of a Brexit delay following two House of Commons defeats by the Prime Minister. The FTSE 100 was off nearly 1.5% in afternoon trading.

Capital Economics responded to the events by saying that “all options are still possible by 12th April”.

UK Chief Economist Paul Dales wrote in a note today: “We are maintaining our three scenarios for the economy based on those outcomes. The timing of the deal and no deal scenarios shift from 29th March to 12th April, but the trajectories for economic growth are much the same. We’re changing our previous ‘fudge and delay’ scenario, which assumed a deal after a three-month delay to Brexit, to a ‘long delay’, which assumes a deal after a 12-month delay to the end of March 2020. The longer period of uncertainty means GDP growth would be a bit weaker in both 2019 and 2020 than in our previous ‘fudge and delay’ scenario.”

Franklin Templeton’s head of European fixed income, David Zahn, says the markets are likely to remain skittish in the coming weeks: “We’d expect sterling to remain range-bound, with the latest headlines dictating its movement. It should be a similar story for UK government bonds. We’d expect gilts to remain quite well bid until we get more certainty.”

He adds that despite the rhetoric and the prospect of no deal remaining on the table, neither the UK nor the European Union are ready for the most extreme outcome.

Mark Dowding, CIO at BlueBay Asset management, argues that a long delay is the most likely outcome. Those on the Remain side shouldn’t get their hopes up though: “It appears that a long extension is now the highest probability, though we would also observe that the Prime Minister’s days are numbered and any Tory replacement is likely to be a more ardent Brexiteer.”

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