Brexit: Let Battle Re-commence

Any number of Brexit permutations are still possible; but investors are not pricing in the two seemingly most probable.

The past three weeks with little or no Brexit 'news' has been blissful. But, sadly, it was never going to last and these next days it will come to dominate the UK headlines yet again — starting tomorrow with local elections in England and Northern Ireland in which Prime Minister Theresa May's Conservative Party stands to lose around 1,000 seats on local councils (admittedly relative to a surprisingly strong outturn in the 2015 elections), mainly to the (pro-ish EU but can't quite make its mind up) Labour Party and the (pro-Remain) LibDems.

As a wide-ranging in today's Financial Times (subscriber access only) makes clear, worse is likely to follow if the UK does indeed hold European Parliament elections on 23 May, as expected. The Conservatives are polling as low as 13%(!), with Nigel Farage's Brexit Party at 28%.

Despite all the speculation in the press, it isn't clear that even two hefty election trouncings in quick succession would see Mrs May either quit voluntarily or be forced out. But the Brexiteers in her party will certainly be pushing hard in that direction hoping to ease Boris Johnson (3/1 favourite with the bookies and pictured above) — or, failing that, former Brexit Secretary (ie one of several!) Dominic Raab — into the job. If this came to pass, the aim of the government would probably be to renegotiate the May treaty — which the EU27 have, so far, said is just not going to happen — at least to get rid of the Irish backstop; or, failing that, simply to leave with no deal come 31 October, which is also not as straightforward as it may seem as parliament is likely to continue to vote strongly against a no-deal Brexit.

This latter point is important since it is a scenario which comes with a highish probability of an early general election. Opinion polling since early April has pretty consistently given Labour a lead over the Conservatives; but that lead ranges from 1% to 10% so the likely outcome is not easy to forecast (although if Mr Johnson were to be leading his party into an election his unpopularity with all but the 'Tory faithful' is such that it could tilt the outcome decisively to Labour). The bookmakers agree, offering more or less the same odds on Labour and Conservative. However, this is not insignificant in that Labour would almost certainly find it easier (though not necessarily easy) to negotiate a majority coalition (or, at least, confidence & supply agreements) with the likes of the SNP and possibly the LibDems and Change UK IF they were to agree unconditionally and bindingly to a second referendum (which they may be more inclined to do, having achieved their principle objective of a general election).

None of which is to say that the future looks irrevocably 'binary'. There are all sorts of permutations still possible. BUT I do have a growing sense that the highest probabilities (at least as of today) should probably be given to either a no-deal Brexit or a second referendum under a Corbyn-led government.

And, as sterling still hovering around USD1.30 makes absolutely clear, neither a no-deal Brexit nor the full enormity of a genuinely socialist government in the UK is even close to be priced in by financial markets.

Alastair Newton