The City Thinks an ‘Awkward’ Brexit Extension Could Push Out Theresa May

(Bloomberg) -- British Prime Minister Theresa May’s task to sell the extended Brexit deadline to MPs will be a tough one and could lead to attempts to replace her, market strategists say after last night’s negotiations in Brussels. The six-month extension could support the pound and U.K. stocks with softer departure options or even the possibility of ending the separation plans via a referendum, with the focus now turning to domestic politics. FTSE 100 futures point to a flat open, with the sterling little changed.

Here are reactions to the news from market participants:

Citigroup, Christian Schulz

• With no-deal off the table for now with an “awkward Brexit extension” and local and European elections ahead, opposition Labour “seems unlikely” to help May find a Brexit compromise
• “May might hang on for longer, but her options continue to dwindle”
• “A snap general election remains a logical step to restart the U.K. Brexit process, even if it doesn’t guarantee a breakthrough. But the short extension may diminish the appetite for a vote somewhat for now, especially as the Conservatives might have to choose a new leader first.”
• “The U.K.’s choice becomes more polarized between no-deal and no-Brexit, making a second referendum ultimately more likely”

Goldman Sachs, Jari Stehn

• “A six-month delay to Brexit mitigates the risk of a disorderly departure, but it also reduces the incentive for MPs to compromise”
• “A long extension also increases the likelihood of a snap general election”
• Sees outcome probabilities unchanged, with no-deal Brexit at 10%, delayed ratification of a modified Brexit deal at 50%, and a confirmatory second referendum with no Brexit at all at 40%

London Capital Group, Jasper Lawler

• “The pound is starting to look rather numb to all the Brexit drama”
• “The resilience that we are seeing in the pound as a no-deal Brexit is avoided (again) may not last for long. Whilst we expect the floor at $1.30 to hold for the time being, movements in Westminster to remove May could see that swiftly broken”

CMC Markets, Michael Hewson

• May’s need to make the case to Brexiter MPs that the U.K. will be in the EU for six more months is “not likely to go down well, which could well increase internal party maneuvers to replace her”

DeVere Group, Nigel Green

• “We can expect a relief rally of the pound, as investors digest the news that Brexit negotiations have longer to run, and the U.K. will not crash out of the EU on Friday, and the likelihood of a softer Brexit is significantly increased”
• “Investors are advised to now be on the watch for this relief rally in sterling, U.K. stocks, and also a mini spurt in economic activity in the U.K., as delayed household and business spending takes place”
• “In the meantime, this medium-length extension doesn’t change the fundamentals significantly. What businesses in the U.K., the EU, and around the world that trade internationally need and want is decision, not further fudging”

--With assistance from Jan-Patrick Barnert.

To contact the reporters on this story: Kasper Viita in London at kviita1@bloomberg.net;Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, ;Celeste Perri at cperri@bloomberg.net, John Viljoen

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