Strategy & economics
How the Brexit delay has moved markets – and what it means for the economy
Theresa May’s deferral of the Parliamentary vote on Brexit has been greeted with widespread dismay
Markets faced further uncertainty today after the Prime Minister Theresa May began a series of European meetings in the hope of securing an improved deal on Brexit.
However, Jean-Claude Juncker, President of the European Commission, this morning warned that the current agreement was “the only deal possible”.
Mrs May yesterday postponed Parliament’s “meaningful vote” on the government’s proposed Brexit deal. She will meet European leaders today before heading to Brussels for talks with Mr Juncker and Donald Tusk, the President of the European Council.
The pound fell by as much as 1.8% against the dollar yesterday, taking it to $1.255, its lowest level since April 2017. Sterling also slipped against the euro to as low as $1.105.
The FTSE 100 index also fell yesterday, down 0.83%, even though UK stocks with international earnings normally benefit from falls in sterling. The FTSE 250, where fewer companies benefit from this effect, ended the day down 1.97%.
Gilt prices rose with the yield, which has an inverse relationship with price, falling seven basis points to 1.16%.
Markets rallied this morning. By 3.15pm, the FTSE 100 was up 1.9% at 6,848. Sterling had recovered some of yesterday’s falls at $1.26 and €1.109.
Our Global Economist Janet Mui said: “Facing overwhelming criticism regarding the Northern Ireland backstop, the Prime Minister has promised to hold new discussions with the EU at this week’s summit.
“The key is that she secures reassurance that her EU counterparts will not use the backstop as leverage in future economic relationship negotiations.
“The delay and lack of clarity as to the future date of a ratification vote has further hit confidence, seen most notably by the fall in the pound after the announcement.
“The range of possible scenarios from here now include a further vote on the existing or amended deal, revoking or suspending Article 50, a second referendum, general election or a Brexit with no deal – either managed or disorderly.
“As we near the end of January, the risk of no-deal will become increasingly pressing. The agreement, amended or not, may start to appeal to some MPs as a better option than crashing out. The ruling yesterday by the ECJ that permits the UK to unilaterally revoke Article 50 opens the possibility that Brexit may not happen at all. Hence even determined Brexiteers may be incentivised to accept the deal – as not accepting could lead to revoking Article 50.
“The complex array of potential outcomes creates more uncertainty. This will keep sterling volatility elevated and put downward pressure on UK domestic assets. Business and consumer sentiment is going to be further dampened, resulting in less investment and spending. The fall in sterling is likely to lift inflation, eroding consumers’ real income growth.”
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