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.

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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