AXA IM: Commentaar David Page - Econoom op de Brexitdeal

AXA IM: Commentaar David Page - Econoom op de Brexitdeal

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David Page, Senior Economist at AXA Investment Managers, comments on the latest Brexit deal agreed between the EU and UK:

•The EU and UK manage to negotiate a new deal for the UK to leave the EU after a week of intense negotiations.

•Focus falls to the UK Parliament that will have to approve this deal. The Benn Act sets a deadline of 11pm on Saturday (19 October) to realise this without requiring a further extension.

•A Parliamentary vote will be tight, with Johnson’s Parliamentary numbers, if anything, worse than PM May’s and his deal further from the Labour opposition’s own view.

•Acceptance of a deal would see the UK move to a transition phase that would create increased certainty and likely deliver some immediate boost to the UK and broader EU growth outlook, removing the risks of a “no deal” Brexit.

•Rejection would likely result in a more immediate extension of Article 50 that would likely involve a General Election, but would extend the Brexit uncertainty into 2020.

•Financial markets have made strong moves on the back of these developments. These could extend (acceptance) or reverse (rejection) based on the outcome of the coming day’s Parliamentary decision.

The EU and UK have concluded a new deal for Brexit. Prime Minister Boris Johnson described the deal as 'a great new deal that will take back control'. EU president Juncker stated that it was a 'fair and balanced' agreement. The deal follows a week of intense negotiations following PM Johnson and Taoiseach Varadkar’s meeting last Thursday which discussed a 'pathway to a deal'. The negotiations have been conducted with unusually little leakage over the substance of the deal, likely to include regulatory alignment across Ireland – subject to consent from the Northern Ireland public, Northern Ireland technically remaining within the UK customs union, but practically imposing differential tariffs from the rest of the UK that could require a de facto border between Northern Ireland and the rest of Britain, and some agreement surrounding complicated VAT procedures. This will be presented at today’s EU Summit.

The fact that the UK and EU have managed to recraft a deal after the failure of the UK government to pass the previous Withdrawal Agreement through Parliament is an achievement in itself. Whether this will resolve the first stage of the Brexit process relies primarily on the ratification through the UK Parliament. With the Benn Act requiring the Prime Minister to seek an extension to Article 50 if no deal has been approved by 11pm on 19 October (Saturday), there is now a race against time for the UK government to pass this deal and Parliament’s sitting on Saturday for only the fourth time since 1939 will provide this opportunity. On 30 March, previous PM May lost a Parliamentary vote to pass her own Withdrawal Agreement by 58 votes, with 286 voting for the Withdrawal Agreement. While most will not change their vote, this deal could be very different and appears to include a division between Northern Ireland and the rest of Britain that May had stated 'no British Prime Minister could ever accept'. This may test some of those that supported a Withdrawal Agreement then. Indeed, the DUP has already announced that it cannot support the deal 'as things stand' – although this suggests there is still some room for manoeuvre, which may involve further negotiations with the DUP in parallel to the EU deal. The UK party has also been fractured since, with Johnson’s government now operating without a working majority. However, many of those expelled from the party objected to the hardline pursuit of “no deal” and could back a deal that did not contain the controversial Irish 'backstop arrangement'.

In truth, though Johnson is likely to require cross-party support to get this deal agreed. Opposition Labour leader Jeremy Corbyn’s immediate reaction that the Johnson deal was 'even worse than Theresa May’s' suggests that this will not be particularly forthcoming. Votes for Theresa May’s deal were supported by only a handful of Labour MPs. This deal is also further from the Labour agreed position on a Customs Union arrangement with the EU. Moreover, with the prospect of a legislative backstop preventing a 'no deal' exit on 31 October and the possibility of a General Election, there may be even less incentive to back this deal. That said, with over 100 Labour MPs coming from strongly Brexit supporting constituencies, there may be growing appetite from some to accept this deal and resolve Brexit before an election that is forcing the Labour Party into an ever more Remain leaning position. While more generally an overwhelming sense of Brexit fatigue may also led some to accept the relative certainty that this deal offers, even if it is recognised as sub-optimal. These uncertainties mean that a Parliamentary vote on the deal, required before 11pm on Saturday to satisfy the Benn agreement will likely be very tight.

With one large hurdle cleared to secure Brexit on 31 October to a period of transition, the focus will now shift to the UK Parliament, with a vote expected on Saturday (although with some possibility that this could be delayed into next week if Parliament required more time for scrutiny). If Parliament agrees the new deal negotiated, the UK would leave the EU on 31 October and enter a transition period, where a future trade relationship with the EU would be negotiated. While still uncertain, the range of possible outcomes would shrink materially over this period and confidence in the outlook for the UK and EU would likely begin to recover. Should Parliament reject this deal, the Benn Act is likely to require an extension of Article 50, which a likely bewildered EU would still likely be forced to accept, particularly if this ushered a General Election in the UK, which could see this deal returned to in 3-months’ time (or later), but equally might take the UK down a different path, including a second referendum. For now, we watch the developments over the coming days to see which outcome prevails.

Financial markets have been following the Brexit process with increasing optimism. Sterling has risen from $1.22 to the US dollar and rose further today to $1.288, nearly 6% higher than a week ago. This move was reflected in Euro/sterling which set a near six-month low of £0.862, having traded around £0.90 earlier this month. Gilt yields also reflected these developments, 2-year gilt yields rose to 0.55% from 0.32% last month, 10-year yields to 0.74% from lows of 0.40% last week. And equity market also performed well with the FTSE 100 trading to 7214, despite sterling’s gains, and the mid-cap FTSE250 exceeding 20300, up 6% since last week. Directionally we would see scope for further progress in this direction if Parliament secures a Brexit deal over the coming days. However, uncertainty over this process is likely to keep volatility high over the period.