Johnson’s Parliament Tussle Adds to U.K. Risk, Strategists Say

(Bloomberg) -- As if the outcome of Brexit talks with the European Union weren’t uncertain enough, U.K. Prime Minister Boris Johnson dialed up the chaos factor with plans to suspend Parliament ahead of October’s deadline.

The pound fell as much as 1.1% Wednesday, pushing exporter-led stocks on the FTSE 100 higher. With investors trying to suss out whether the probability of Britain crashing out of the EU is increasing, domestically oriented stocks have fallen further out of favor, and U.K. assets in general could see higher risk assigned to them.

Here are reactions to the news from market participants:

Makor Capital Markets, Stephane Barbier de la Serre

• Beyond the knee-jerk GBP-induced bounce of FTSE 100, we would rather see it as a case of raising risk premiums on just any U.K. assets
• Even though we had heard rumors that something like this could happen, that does sound very weird: somewhere in between a South American military coup and a desperate attempt to muzzle any kind of parliamentary opposition right in the middle of a crucial national debate
• Very bizarre -- then again, and we are not quite sure what the next steps (both from the executive and parliamentary side) could be, but the sure thing is that this considerably raises the level of uncertainty, the thing that markets dislike the most

London & Capital Asset Management, Roger Jones

• The move is not totally unexpected, given the press speculation that this would be Boris Johnson’s approach
• It does serve as an alarm for markets that the period of maximum Brexit and U.K. political uncertainty has begun
• Sterling will continue to be the main driver, which will push the U.K. equity market (international stocks vs domestic stocks), while bond markets are already being pushed to lower yields due to the moves in U.S. treasuries and bunds

Miton Group, Eric Moore

• The idea of taking Parliament out of the equation around Brexit decisions is not going to be acceptable to anyone
• What it means as a portfolio manager is pretty much a nightmare, because I don’t think you can sensibly try and position the portfolio one way or the other
• Cautious on domestic stocks, focus more on overseas earnings like pharmaceuticals, resource stocks

Brooks Macdonald, Edward Park

• With only 22 scheduled business days for the House of Commons between now and the Brexit deadline, removing around a third of these will cause procedural issues for opposition plans to legislate to prevent a no-deal Brexit
• With the outcome of Brexit remaining volatile and unclear, sterling will remain under pressure and trade within a range that reflects the dual possibilities of a deal and a disruptive exit
• As a result, we maintain our underweight to U.K. assets despite the valuations on offer

Mediolanum Asset Management, David Holohan

• Clear negative for sentiment toward U.K. domestic equities while the weakening in sterling helps FTSE 100 stocks
• It remains to be seen what the response of the Remain politicians will be but this clearly increases the odds of a hard Brexit as it stands currently

Nomura, Jordan Rochester

• Hopes have been dashed that rebel MPs were walking into an easy fight, and the government is making it as difficult as it can be
• For GBP to recover the fall this morning, no-deal MPs will have to get their acts together in the first weeks of September -- no more delaying
• The fall in GBP isn’t expected to extend into a new trend as Parliament isn’t completely prorogued, just has to bring forward plans, and the market is already short GBP

Berenberg, Holger Schmieding

• If Parliament is indeed suspended from around Sept. 11 until Oct. 14, Johnson would likely claim that this strengthens his bargaining position versus the EU
• With less time for Parliament to stop him, the EU would have to take his threat of a hard Brexit on Oct. 31 even more seriously
• The EU may thus be more willing to cave in and ditch the controversial “Irish backstop”

Barclays, Emmanuel Cau

• The clock is ticking and the risk of no deal appears to be rising, which will likely keep GBP under pressure and help U.K. exporters over domestic plays

London Capital Group, Jasper Lawler

• Here’s the dilemma for whether traders follow through on the knee-jerk selling: Chances of a no-deal exit increase if Parliament cannot block it, but arguably the chance of a deal improves if the EU recognizes that the fate of no deal rests with them
• This latest twist in the Brexit saga reinforces our view that the odds of a Brexit deal have improved, but still that no-deal is most likely

--With assistance from Lisa Pham, Kit Rees and Jan-Patrick Barnert.

To contact the reporters on this story: Michael Msika in London at mmsika4@bloomberg.net;Sam Unsted in London at sunsted@bloomberg.net;Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Tom Lavell, Jon Menon

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