After a delay of more than a month, today’s the day that Theresa May’s Brexit deal will finally be put to parliament in what is widely expected to be a heavy defeat for the PM. Unsurprisingly, UK markets are trading cautiously ahead of the event with the FTSE and pound little changed. With the result expected to be known later this evening around 8-9PM, traders are on tenterhooks as they nervously await the outcome which will no doubt lead to heightened volatility and may well provide the catalyst for an outsized move in both sterling and UK stock futures.
Yet another flesh wound for May?
It says a lot about the current state of UK politics that the PM could well suffer a large defeat, with some projecting a margin against her of more than 200 votes, on arguably the biggest piece of legislation since WWII and yet, it will in all likelihood do little to threaten her position as party leader and head of the government. In the expected event of a defeat, the leader of the opposition, Jeremy Corbyn, is expected to table a vote of no confidence in the government - which could happen as early as tomorrow - but this remains improbable to succeed. Theresa May will have to scramble to rapidly construct a plan B should her initial proposal be rejected, with not even her closest cabinet members in the know as to what this would entail.
Possibility for another TARP scenario
A so-called TARP scenario, referring to the US bank bail-out package following the collapse of Lehman Brothers, is cited by some as providing a possible blueprint for how this may play out. Back in 2008 Congress rejected the package which triggered a fall of almost 10% on Wall Street, before the house backtracked four days later and approved it. Some believe that a sharp drop in the pound if May’s deal is rejected may cause MPs to reconsider their stance, as a strong negative market reaction would highlight the effect the alternatives could bring.
Brexit deadline to be extended?
Despite the likelihood of a no-deal dropping significantly according to consensus expectations of late (due in no small part to the votes lost by the government last week) a heavy defeat later would raise this prospect once more and could lead to a flurry of selling in sterling. A sizable consensus is starting to form that sees an extension to the Article 50 deadline beyond 29th March and this is beginning to be priced into the markets somewhat, with the pound hitting a 7-week high yesterday.
Should this extension occur then further gains for sterling will likely follow, but any suggestions that an extension won’t happen could shock the markets and send sterling tumbling once more. An extension would require the explicit consent of the other 27 EU members and this is far from a given - especially if the extension is seen as just a delaying tactic and doesn’t come about from a marked shift in the UK’s negotiating stance.