Market Insights

Deal? Update 2

Who resigned? 

In order of the time of their resignation:

  • They’re all on the more Brexiteer side of our spectrum but they’re certainly not all raving ideologues – for comparison JRM is +15, Gove +11
  • They’re from a mixture of seats that voted to Leave and to Remain – and the Leave seats are not as strongly in support of Leave as, for example, some Labour-held seats in the North
  • They all have solid majorities – suggesting that might be less of a motivating factor for how MPs ultimately decide to vote
  • They gave a mixture of reasons, but most common thread is defending the Union – so it’s not just the DUP that have been lost with the special rules for Northern Ireland, but members of what is, after all, technically known as the Conservative and Unionist Party

So this can’t be written off as just a bunch of loony Brexiteers throwing their toys out of the pram. It might just be that MPs have decided to vote on their principles – with half an eye of course on whether they want to be tainted with a deal they feel they can’t sell. This implies the Parliamentary Vote will be even more difficult to win than we thought.

Shocks?

Losing the Brexit Secretary is astonishing. Two have now been lost when the two decision points in the negotiations have been reached. They have both been Brexiteers. If Michael Gove takes up the post (unclear at time of writing), can he be the Brexiteer to bridge the Remainer divide?

It’s rumoured he hasn’t yet taken the job because he wants free rein to renegotiate it. If he gets that mandate, manages to change course (or at least sell a change of course), the parliamentary arithmetic could shift.

Penny Mordaunt hasn’t yet gone as apparently she is demanding a free vote on the final deal in Parliament, i.e. so that MPs are not bound by the PM’s decision.

Adding together Raab’s surprising pique, Gove’s chutzpah, and Mordaunt’s defiance we can see that TM has lost what little power she has left. Theresa unfortunately has a habit of slighting her ministers unnecessarily.

  • Raab was always unhappy that although Brexit Sec, he didn’t really do any of the negotiating, but instead it went through civil servant Olly Robbins.
  • Gove and Theresa have strong personal antipathy so there will be an element of him exacting his revenge
  • Mordaunt evidently doesn’t trust TM’s assurances that it’s her Deal or No Deal; why ask for a free vote as party discipline has broken down so much that it’s likely MPs vote with their conscience without fear of consequence when the time comes anyway

What happens next?

TM lives to fight another day, and, most likely, the weeks until the Parliamentary vote.

  • Despite Rees-Mogg putting in his letter, it’s still unclear whether the magic 48 have been reached to force a leadership contest
  • This is unsurprising as it’s still not clear who the frontrunner challenger would be, or whether they would want it at this stage
    • TM has said she would still run in a contest. Under the rules, if she wins then no-one could challenge her for 12 months. That’s what continues to stay the hand of the ERG: they run the risk of their Brexiteer candidate losing out to TM if she wins centrist and Remainer votes.
    • If anyone actually wanted to take her on they would have challenged her after last summer’s election. Instead, the Boris Johnsons of this world have calculated that it’s better to let her fail completely and then be begged, like Superman, to Save Us All.
  • TM therefore needs fatally wounding, which would clearly come with the Parliamentary Vote

The only thing that could change this and hasten her demise would be a resignation from Gove and/or one of the other Cabinet big beasts like Hunt or Javid.

And then?

Then it’s onto the Parliamentary Vote where we emphasise again that it’s becoming in more and more people’s interests for there to be mayhem. If the government falls to a confidence vote, loose coalitions of the willing will hope they can become the government within the 14 day period before it goes to a General Election that nobody – including the general public – wants.

Wildcard?

We haven’t yet heard from the EU27 governments. They only got sight of the document last night themselves. Will they seek also to unpick the deal? Is it too nice to Britain? Must France and Spain object pour encourager les autres, like, say, those autres in Italy.

Market response?

Only today has everyone woken up to the idea that there are a plethora of future paths for the UK, all of which are likely to damage the economy. A new PM, No Deal, or No Brexit. GBP/USD can easily fall back below the 1.1800 lows, particularly when so little is trading and liquidity is already at a premium. Remember the flash crash in Asian hours in 2016? Cable has never had a reputation as the most stable currency pair. It’s already been the biggest drop in 10y Gilt yields since 2016. The question is when UK yields actually rise as an EM-style risk premium gets priced in. Expect more volatility ahead.

Brexit Secretary Resigns. Again.

It was already bad enough that a centrist junior minister had resigned (see below). But to lose the Brexit secretary over the Brexit deal? After having lost the previous one over the previous Brexit deal? If she can’t even sell it to that person, how can she sell it to anyone else?

Raab going provides cover for the other reported dissenters to resign, not to mention other junior ministers. Those who reportedly dissented in the meeting yesterday: Fox, Hunt, Williamson, Mordaunt, Javid, Leadsom, McVey and Grayling.

It also provides fodder for all those unhappy with the Deal to use it against her, whether Remainer, Leaver or Corbynite. Mayhem, as we said yesterday, suits many people.

TM will either have to change course, resign, or face a leadership vote. On current form, she will stay and her party will have to move against her. But the question is who would they rally around? David Davis has been pitching himself as a caretaker leader for some time. But that would certainly not please everyone. The letter-writers won’t move until they know they’ve got their choice in place.

This is not going to be resolved quickly. GBP and Gilts should be hit with the latter facing a 20y bond auction this morning as TM gives her statement to Parliament.

Muddling through while dismissing dissent as mere “noise” must now clearly be the least likely outcome. All sides had been keeping their powder dry until the last moment. That moment is now upon us.

–More on the Withdrawal Agreement below–

The Withdrawal Agreement is a triumph in its legal skill of squaring the circle of a soft border in Northern Ireland with leaving the EU. But its disaster lies in the tortuous complexity required to deliver this goal. We could bore you with the detail but this snippet alone demonstrates what you would be up against.

The devil in the detail is that there will be three options in the summer of 2020:

  1. A free trade deal will be ready by the end of the transition period and it will be seamlessly activated
  2. A free trade deal is almost ready but needs more time, so the transition period is extended for an indeterminate number of years
  3. Nothing is ready and won’t be ready by the end of the transition period, so a backstop kicks in
    1. Whereby the whole of the UK remains in the Customs Union with the EU
    2. But Northern Ireland has special extra Single Market rules so that the border remains frictionless

You can see why the PM is happy with this. The focus is all about the leaving open the path to a free trade deal yay! And Northern Ireland remains part of the UK really, except for a little bit to let them have a soft border which they want anyway right?

It’s like she was given a really complex mathematical problem operating against various constraints and the computer spat out the least bad option.

Those disposed to pragmatism consider that this is how all negotiations end up, with everyone a little bit unhappy.

Unfortunately, the Brexit referendum wasn’t a problem to be solved. It was an emotional primal scream.

And the role of the leader in that circumstance is to express the emotion, feel it, and make it flesh.

Theresa May is not that kind of leader. Give her a task, she will perform it to her utmost. She will corral the policy wonks to produce something. But that means she is always on the backfoot. Always responding to what she’s been told to do. What her duty requires.

That’s why her sales pitch for this deal is: “it’s not perfect, but it was never going to be. You all had impossible expectations. I did my best. I’ve got something. There’s no other option. Vote for it”.

For those for whom remaining or leaving the European Union is a matter of faith that possesses their entire being, this was never going to wash. The Sun, as ever, nails it with its front page today:

By delivering 585 pages of detail, instead of solving all the problems, it opens up new ones:

  • The whole of the UK could now remain in a Customs Union with the EU indefinitely
  • And if it wanted to leave, it would have to get agreement from a panel containing equal representatives from the UK and the EU along with an ‘independent’
  • And Northern Ireland would end up distinct from the UK
  • And the European Court of Justice would still be involved to adjudicate
  • And even if the UK decided to disregard all of this there is provision for the EU to whack tariffs on us to restore the level playing field

This is quite clearly worse than just remaining in the EU, let alone paying £39bn for the privilege of leaving. Which angers Remainers and Leavers alike.

And while TM worked on talking to EU negotiators, she neglected her Cabinet.
And then she worked on her Cabinet, but the 5-hour meeting yesterday was full of tears and tantrums.
And then she tried to talk to her Party, many of whom already want her to go.
And then she talked to her confidence-&-supply governmental partners, the DUP, who can’t believe they have been betrayed.
And then she talked to the First Minister of Scotland, who sees special details for Northern Ireland but not for her country.
And then she talked to the Opposition Leader, in recognition that she might need him more than anyone.

It’s tough, you might say, dealing with all of those people. What else could she have done?

Just think what a real leader would have done. Blair or Thatcher would never have focused on solving a problem caused by the parameters of the other side. They would have been on the front foot from the start.

Remember, politics is not about what works. It’s about what sells. Only when you’ve sold it will you be able to implement it. Theresa does it the other way around. That is why we are now facing a crisis.

This morning the junior Cabinet minister Shailesh Vara has resigned. You’ve likely never heard of him, but he gave a clear explanation for his reasoning: that it doesn’t honour the vote of his constituents who voted 57% to Leave. He himself voted to Remain and on our rankings is a pragmatic centrist.  He has a solid majority. He doesn’t need to panic. He’s a minister. He’s the exact type of person who should easily back the PM’s line. If he doesn’t it stands little chance of surviving.

Deal?

At the time of writing, this is what we know: 
– The Withdrawal Agreement, 500 pages long, is ready and Cabinet ministers saw it Tuesday ahead of their meeting 2pm Wednesday
– EU27 Ambassadors meet Wednesday to give their approval
– If Cabinet approve, UK PM to give press conference
– Next date would then be sherpas meeting 21 Nov ahead of EU Council meeting 25 Nov

The document is expected to solve the backstop issue by making it:
– A UK-wide customs union with an independent panel made up of half EU, half UK representatives to arbitrate a ‘good faith’ end mechanism
– Not time limited but six months before end of transition period in summer of 2019, the UK will either move to a free trade deal, or extend the transition by a year, or the backstop will kick in
– But NI would also potentially have to remain in the single market for goods to ensure a soft border, meaning NI would have to follow all EU rules
– And the UK, if in the Customs Union, would have to follow EU rules on competition and regulatory standards in order to compete on a ‘level playing field’
In other words, tortuous legal language will be employed to render the NI-only backstop incomprehensible. But not invisible. 

The response:
– DUP Arlene Foster isn’t happy: ‘An agreement which places new trade barriers between NI and GB will fundamentally undermine…the UK. That is not acceptable
– SNP Nicola Sturgeon takes the Remainer line: ‘If the PM’s ‘deal’ satisfies no-one and can’t command a majority, we mustn’t fall for her spin that the UK crashing out of the EU without a deal is then inevitable – instead we should take the opportunity to get better options back on the table‘.
– Brexiteers are furious, with the UK unable to make free trade deals while in the Customs Union and being forced to be a rule-taker. Boris branded itutterly unacceptable‘ and called for Cabinet ministers to resign rather than accept it.

Can the Cabinet agree to it?
– No resignations at the time of writing suggests that no-one wants to go first for being portrayed as a wrecker
– The “big 5” are reportedly on board: Raab, Hunt, Javid, Gove, Cox
– McVey and Mordaunt might be wobbly but that has been reported for weeks and would likely not hurt the government too much
– Our ideological ranking of Brexit sentiment suggests Gove would be the most likely to cut and run. We already know he has a history of being unpredictable at the last minute when he feels a flash of glory rush to his head

– We also know that if that did happen, and Gove captured the hearts of his Brexiteer side of Cabinet, the PM would stall for time to roll on the discussion and get everyone on board
– But it would inevitably leak that Cabinet ministers tried to derail the process and they will have to be careful that even as they get in their excuses, they will not be thanked for bringing problems rather than solutions
We therefore believe Cabinet will approve the deal, with a few resignations as collateral damage.

More important is the DUP. If they refuse to budge then it’s tough to see how they can continue to be in a confidence-and-supply arrangement propping up the government.
It is notable in Arlene Foster’s statement that she makes a plea to ‘friends of the Union on both sides of the House…who have pledged to stand with the DUP in opposing a deal… every individual vote will count‘. That is quite clearly a call to anyone but the government to back their position.

There will now be 3-4 weeks until a parliamentary vote. Remainers will agitate for another referendum; Brexiteers for No Deal. Corbyn wants a General Election. All of these possibilities now open up properly in the months ahead for the first time. The crystallisation of these risks means we are entering the most dangerous period for GBP and UK assets. But with a market rendered mute by what appears to be a moment of collective insanity for the UK, the focus should instead be on businesses activating their contingency plans. Unless a parliamentary vote suddenly looks to have more than a 50% chance of passing, corporations will have to press the big red No Deal button.

Which Labour MPs will vote Conservative?

Attention has moved from the 40-80 Conservative MPs that Steve Baker claims can kill the government, to the 30-40 Labour MPs that Downing Street hope can let its deal survive. The Times and the FT both run stories today on these so-called Labour rebels.

The headline is misleading. The quotes from Labour MPs show just how uncertain they are over how they will vote. They fear deselection. They hope Corbyn will change. They will vote down the government only to vote with them later. Listen below for our 3 minute wrap with more details:

 

To determine how Labour MPs will shake down, we refer you back to our Labour MP breakdown:

And our table of support for each Brexit outcome:

If you would like more detail on how we calculated these figures, or to run other configurations, please let us know.