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Brexit High Drama

Summary:
Before Prime Minister Johnson submitted the withdrawal bill that he had negotiated with the EU, a Tory-backed bill to not consider it until the implementation bill is approved, carried by a 322-306 margin.  The disgruntled Democrat Unionist Party's 10 votes made the difference, but there were also 10 independent Conservative MPs, who had lost the whip or voluntarily surrendered that also voted against the government.  A few have indicated that they do in fact support the agreement Johnson negotiated   The Benn Act required the Prime Minister to request a three-month extension if there was no agreement reached on October 19.  Despite the sophomoric details, EU President Tusk accepted Johnson's letter as a request for an extension.  There was a brief meeting early today (October 20)

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Brexit High Drama
Before Prime Minister Johnson submitted the withdrawal bill that he had negotiated with the EU, a Tory-backed bill to not consider it until the implementation bill is approved, carried by a 322-306 margin.  The disgruntled Democrat Unionist Party's 10 votes made the difference, but there were also 10 independent Conservative MPs, who had lost the whip or voluntarily surrendered that also voted against the government.  A few have indicated that they do in fact support the agreement Johnson negotiated  

The Benn Act required the Prime Minister to request a three-month extension if there was no agreement reached on October 19.  Despite the sophomoric details, EU President Tusk accepted Johnson's letter as a request for an extension.  There was a brief meeting early today (October 20) in Brussels of EU ambassadors, who seemingly wanted more information.  The EU did not respond immediately.  It can decide after it sees this week's developments.  

The government wants the new bill to be debated, and a vote held on Monday and claims because it will be approved, no extension is needed.  There are many moving parts, but the most likely course seems to be debates, amendments, and vote in the coming days on the implementation bill and then the actual withdrawal bill.  A confirmation referendum that Labour is seeking is unlikely to be able to take place until well into next year. 

The outcome is not clear, but both the Financial Times and Bloomberg, for example, still see the eventual acceptance of the new deal.  Johnson has not won a decisive vote in Parliament, and we note that PredictIt.org participants see only about a 30% chance that the UK leaves at the end of this month.  Moreover,  the agreement does not preclude that the  UK and the EU part ways with only the WTO agreement at the end of the transition period.    

It does seem ironic that having Northern Ireland remain in the EU customs union was rejected by the previous Tory government as unacceptable but has now somehow become acceptable. Former Prime Minister May voted with the government, for example.  It might be tempting to think that businesses that use the UK as a platform to penetrate the rest of the EU could move to Northern Ireland. However, the material infrastructure may not support it, and the eco-system of lawyers, accounts, and consultants, logistic companies, etc. are not present in sufficient scale.  

The uncertainty is likely to weigh on sterling when trading resumes in Asia Pacific on October 21.   Volatility will remain elevated until a clearer picture emerges.  

Disclaimer

Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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