BNY Mellon: Yet Another Extraordinary Week Ahead

18 maart 2019

What happened last week?

Tuesday saw a meaningful vote on both the negotiated withdrawal deal with the EU and a series of supporting documents. The deal was defeated by 391 to 242 votes. This compared to a defeat by 432 to 202 of the negotiated deal on January 15.

Thursday saw a motion passed which set this Wednesday coming as the deadline for MPs to pass the negotiated deal. If the deal was passed by then then the PM said she would seek an extension of article 50 until June 30. However, if the deal was not passed by then then the government would seek a longer extension, requiring the UK to take part in the European elections in May.

Will another meaningful vote really take place this Tuesday?

Not necessarily. While strenuous efforts have been made to win over opponents of the government’s negotiated deal, there were hints from both the UK chancellor and the trade secretary  on Sunday morning that it might not go ahead.

Could there be another confidence vote in the government?

Yes. On Sunday morning Labour leader Jeremy Corbyn said he believed the government would be defeated again (if the withdrawal deal were brought to a meaningful vote this week) “and then I think a confidence motion would be appropriate”. He did not mention whether a confidence vote would be brought if the deal were not brought to a meaningful vote this week (although it seems reasonable to assume that he probably would).

Could the government lose a confidence motion?

The are 313 active lawmakers on the Conservative benches. In addition there are 10 members of the DUP which supports the government by a confidence and supply agreement as well as the 11 members of the newly formed Independent Group of MPs . Active Labour lawmakers combined with MPs from the SNP, Plaid Cymru, Green Party, Liberal Democrats and the remainder of the independent MPs number 304. It would therefore likely take 15 rebel Conservative MPs to actually vote against the government to bring it down.

Is that likely?

Unknown

What do the opinion polls say?

Recent polling has been very mixed, singing from a 10 percentage point lead for the Conservative Party to a 4 percentage point deficit

GBP and general elections

• GBP has tended to put in an improved performance when the Conservative Party has done relatively better in opinion polls in the run up to general elections (although this wasn't particularly true in 2005). Interestingly, in 1997 this happened even though there was no realistic chance of a Conservative victory emerging. This suggests that relative shifts in polling in the run up to an election can have an impact on GBP even if the absolute gap between the two main parties remains substantial.
• The market has tended to dislike uncertainty (with 2010 providing the best example of this).
• There has been a tendency towards lower volatility in the run up to the election with the only real exception being 2010.
• The threat of a coalition in 2010 was treated poorly by the market. This came despite the fact that GBP remained relatively stable during the period of the 1974 Labour minority government and rallied during the time of the Lib/Lab pact in the late 1970s.
• The price action on GBP in the run up to the election is not necessarily a guide to what happens afterwards. GBP performed well between 2010 and 2015 during the lifetime of the coalition government. GBP was also consistently strong through most of the period of the three Labour governments between 1997 and 2010.However, it is also worth recalling that GBP suffered badly in the aftermath of the October 1974 vote.