What happened?

Parliament couldn’t decide. Here we go again. The Prime Minister backed an amendment that rejected a deal she had negotiated and instructed her to go back and try a bit harder. Meanwhile, Labour tried (and failed) to get a delay without really knowing what that would achieve.

How did this happen? When the legally binding amendment (the Cooper amendment) to extend Article 50 failed, a non-binding version, the Spelman amendment, was passed. So Parliament has said it doesn’t want No Deal but has refused to take it off the table. Then through the Brady amendment, backed by the government, it decided it doesn’t like the indefinite “Irish backstop” and would like to find “alternative arrangements”. What would those be? Nobody knows, other than some yet-to-be-identified technological solutions.

What next?

On the surface, the possibility of a No Deal Brexit has risen. Even if it’s an outcome that Parliament has rejected, as we get closer to 29 March no deal becomes less unlikely, if only by mistake. To make matters worse, the Prime Minister has promised something she claimed was impossible a few weeks ago – renegotiation of the Withdrawal Agreement. Meanwhile, the EU instantly rejected reopening negotiations.

In reality, the spread of outcomes remain as wide as ever. For starters, Parliament feels it should have been able to give a steer to the government long ago. It is finally learning how to flex its muscles on Brexit. Better late than never. Also, this was an opportunity to patch up a brewing civil war within the Conservative Party while allowing Labour more space to not make a decision. Think temporary “win-win”. But as we get closer to the March deadline, there will be less space for this kind of indecision.

The Prime Minister has promised another Commons vote in mid-February, possibly on the 14th. What exactly might she bring back to the table? Behind the EU’s bluster, it’s an expert at kicking cans down roads. If the UK thinks the way around an indefinite backstop is some technological solution at some point in the future, maybe the EU might be open to agreeing on what kind of parameters it would expect these solutions to meet. (An example is explained in more detail here.) Such parameters “could involve test runs, agreed levels of border security (such as maximum levels of smuggling) and milestones for building the necessary infrastructure for behind-the-border controls.” It’s a long shot but we shouldn’t reject the idea of an updated Withdrawal Agreement.

Portfolio implications?

In the past month, the currency markets seemed to agree with our view that a consensus was building around taking no-deal off the table. The trade-weighted pound has moved up over 4%. Last night’s events haven’t moved the market’s thinking by much. We still think that no deal won’t happen but can’t rule it out yet. We remain overweight the pound in the belief that Brexit won’t be disastrous but are not yet ready to position for a sustained rally in UK equities so remain underweight.