Markets Turn Against May's Deal as Cox's Codpiece Kills Optimism

(Bloomberg) -- Just as all market omens were pointing to renewed optimism over Prime Minister Theresa May’s latest Brexit deal, her Attorney General Geoffrey Cox dashed hopes with his declaration that the accord’s legal risk remains “unchanged” after the revisions.

The pound instantly slid, European stocks fell in the red while U.K. domestic shares pared gains and large caps reversed losses.

Markets Turn Against May's Deal as Cox's Codpiece Kills Optimism

Cox’s opinion -- or his so-called codpiece -- raises the odds that May’s deal will be defeated in Parliament Tuesday night, once again. If that happens, all eyes will be on two subsequent votes: one against a no-deal divorce and another to delay Britain’s departure.

“It was his opinion which matters the most,” Naeem Aslam, chief market analyst at ThinkMarkets, wrote in an email, referring to Cox. “Another historic defeat is strongly on the cards for Mrs. May and all options are on the table with respect to another election or no Brexit at all.”

To be clear, Cox also said that the new deal lowers the risk of the U.K. being locked in the Irish backstop, the provision that has stoked the ire of pro-Brexit politicians.

Brexit-sensitive U.K. stocks from Royal Bank of Scotland Group Plc to homebuilder Taylor Wimpey Plc immediately pared their advance. The mid-cap FTSE 250 Index was up 0.6 percent as of 11:37 a.m. in London, while the FTSE 100 reversed a decline of as much as 0.7 percent to rise 0.5 percent as the pound slid 0.9 percent.

The Stoxx Europe 600 dropped 0.2 percent. U.S. equity futures erased gains to trade little changed.

If the latest deal is defeated and the vote on delaying Brexit passes, the terms of the extension will be key to the market. A three-month delay hardly lifts fears of a “cliff edge,” while a 21-month one will be much more heartening to local British stocks, and, conversely, negative for U.K.-listed multinationals, said Edward Park, deputy chief investment officer at Brooks Macdonald Asset Management in London.

Disappointment could be exacerbated because, judging by the few tentative green shoots in the U.K. market, investor expectations are now higher: Exchange-traded funds targeting British stocks have seen $1.6 billion of inflows this year, compared to $5.5 billion of outflows for European shares more broadly. U.K. domestic stocks have recovered this year as strategists from various banks turned bullish.

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