The U.K. Parliament this week has moved toward our base case for the Brexit process, approaching a short-term extension that will result in a modified deal for Britain to exit the European Union some time before June 30. However, in the words of the poet Robert Frost, “The woods are lovely, dark and deep, But I have promises to keep, And miles to go before I sleep, And miles to go before I sleep.”
In our estimation, ironically after voting down Prime Minister Theresa May’s revised exit deal by a margin of 149 votes on Tuesday, the U.K. Parliament voted down the option of a hard exit on Wednesday. On Thursday it adopted a stance that May should ask for an extension to June 30, contingent on a March 20 vote on a deal. If you’re not confused, then you’re not paying attention. Forward-looking investors, firm managers and policymakers should anticipate another week of votes in Parliament and increasingly frenetic diplomacy across the English Channel in advance of the final March 29 Brexit deadline.
Difficult choice approaches
Essentially, the May government has created conditions whereby if the P.M. is able to obtain a majority in favor of her twice-defeated deal, she can then go to the European Union and ask for the June 30 extension. If May cannot get that deal passed, she will head to an E.U. that then holds the power to set the duration of an extension, if any, that she requests. We note that European Council President Donald Tusk supports a long extension to provide space for the U.K. to rethink Brexit. In political terms, that is akin to saying the longer the extension, the greater the probability that a second referendum becomes possible. During the debate around asking for an extension, Labor Party leader Jeremy Corbyn gave his support for that option. The Tory coalition is under increasing pressure to find a way out of a difficult policy corner it has put itself in.
With less than two weeks to go to the original March 29 drop dead deadline, it would appear that hard-core Brexit supporters are faced with a difficult choice: support what they view as a flawed May agreement or contend with what could be a long, dark and uncertain period that could ultimately result in a second referendum they will most likely lose.
During the past 90 days, our RSM Brexit Stress Index has declined from 2.12 standard deviations above neutral, indicating extreme stress associated with Brexit policy, to .77 standard deviations above neutral. This reflects how markets are pricing in the falling probability of a hard Brexit and the likelihood of the passage of May’s deal or another vote on Brexit itself by the British public. “And miles to go before I sleep.”
