May's Brexit Vote Defeat Shifts Market Focus to Extension

(Bloomberg) -- With the market awaiting the latest Brexit vote in a series tonight -- this one on whether to take the no-deal vote off the table -- the pound advanced 0.4 percent, leaving the FTSE 100 flat. Market strategists are predicting more volatility for the currency this week, as another vote tomorrow could potentially lead to a Brexit delay past March 29.

But before any other votes are held, Chancellor of the Exchequer Philip Hammond will present Parliament his annual spring financial statement.

Read more: U.K. Weighs No-Deal Brexit Vote as May Is Plunged Into Crisis

Here are reactions to the news from market participants:

Aberdeen Standard Investments, Stephanie Kelly

• “Sterling is likely to be volatile in the coming days as investors learn whether parliament will vote down no deal and whether Article 50 will be extended”
• “I would strongly expect that parliament rejects no deal by a large majority”
• Approval of an extension of Article 50 by the end of the week would mean the technical risk of no deal subsides, sterling should perform well in this scenario
• “The interesting question is how long the extension is and what, if any, conditionality the EU attaches since it requires unanimous approval in Brussels. This will condition the market response”
• “A general election would pose a challenge to investors: while a Labour government would likely pursue a softer Brexit, the nationalization policy agenda worries many investors”

UBS, Jon Gordon

• “This supports our view that investors should remain cautious, and avoid chasing short-term rallies in sterling or increasing exposure to U.K. equities”
• “Investors with exposure to U.K. assets should consider hedging sterling over three to six months. Within equities, we recommend a diversified dividend strategy that is likely to outperform in most circumstances’’
• Globally, UBS stays neutral on eurozone equities and underweight U.K. equities as their volatility is likely to exceed historical norms

Citi, Christian Schulz & Tina Fordham

• Base case is rejection of no deal and vote for extension on Thursday, while an early general election could become more likely by weekend
• Sees upside risks to U.K. share prices in the absence of a negative Brexit outcome, such as a no-deal Brexit or a Corbyn government
• “A negative outcome is not impossible but still appears much less likely than a non-negative outcome”
• U.K. equities “look cheap from all angles” and haven’t been this cheap relative to U.S. stocks on a dividend yield basis in 45+ years

WH Ireland, Michael Ingram

• “Equity market reaction to last night’s vote is likely to be muted as it was quite widely discounted”
• “Investors still appear to be underweight both U.K. and European equities and a resolution of the Brexit overhang is a critical - and thus far elusive - catalyst for a market re-rating and more constructive engagement”
• “Although recent parliamentary votes suggest that there is not yet a majority in Parliament in support of a second referendum on the U.K.’s EU membership I cannot but help feel we are inexorably moving towards just such outcome”

IG, Chris Beauchamp

• “One suspects that each new visit to Brussels will get less of a response, and only a general election or a second referendum would now shift opinion, and even then perhaps not by much”
• “Interestingly all 11 of the new Independent Group voted against, which will raise suspicions that the group will swing behind a second referendum in due course”
• Those expecting further gains for the pound will now hope that “no deal” is ruled out Wednesday and that an extension is voted for on Thursday

Gesconsult, David Ardura

• “If we get to the new vote on Thursday and Brexit gets delayed it would be key to determine for how long and with what goal”
• Best scenario would be that a Brexit without an agreement is ruled out

Raymond James, Chris Bailey

• “In practical terms the pound and domestic U.K. assets remain cheap but you have to look through the noise to have sufficient confidence to buy”
• A soft Brexit deal feels “a very possible end outcome because surely today’s vote will tell the hard Brexiteers they risk overplaying their hand”

Goldman Sachs, Jari Stehn

• Continue to see a 55% chance that a close variant of the Prime Minister’s Brexit deal is eventually ratified, after a three-month extension of Article 50
• A third vote in the House of Commons on another iteration of the Prime Minister’s Brexit deal is likely within a few weeks of the EU Council’s next meeting on March 21-22
• Sees 35% likelihood of Brexit reversal, 10% chance of Brexit without a deal

Baader Helvea, Gerhard Schwarz

• Expected delay would buy further time, yet may only provide limited additional support for equities as markets have been pricing in the “hard Brexit is unlikely” scenario for some 3 months already
• “This week therefore may mark the turning point where the first cracks in the “hope trade” which markets have enjoyed since late-December will become visible”
• “Hopes that a Brexit deal may pass UK parliament may be far too optimistic as we still consider the probability for a hard Brexit scenario to be above 50%”
• Globally, most of the positive news may be out while the risks are still widespread
• “Into summer at the latest, we therefore will become more cautious for equities again and – from today’s point of view – will move to an underweight again”

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