Weekly: No to no-deal Brexit

After this week’s developments, markets have been pricing in either a soft-Brexit with some delay or perhaps even no Brexit.
Taimur Baig, Radhika Rao15 Mar 2019
  • The Brexit saga continues to unfold with one intrigue after another
  • PM May’s narrative has shifted
  • The possibility for a long delay and the rejection of a second referendum could see …
  • … a push for new elections and fresh volatility
Photo credit: AFP Photo

The hard Brexit option fades

Global markets are largely focused on the developments on the China-US trade negotiations and China stimulus, while largely ignoring (especially global equity markets) a stream of weak economic data releases. The Brexit saga, meanwhile, continues to unfold with one intrigue after another. In line with the markets’ buoyant sentiment, other than a volatile pound, the impact has been muted so far. Indeed, since British MPs voted resoundingly on March 14 in favour of taking a no-deal Brexit off the table, markets are beginning to price in either a soft-Brexit with some delay or perhaps even no Brexit at all after a possible second referendum.

While not entirely dismissing the possibility of a no-deal Brexit, we are inclined to go with the market in this instance. The stated position of PM May that no deal is better than a bad deal has unravelled in recent days, with her exhortation to Tory MPs shifting to the narrative that saying no to her deal with EU would amount to no Brexit at all. This narrative may just work in convincing sufficient number of her party members to vote in favour of a soft Brexit next week. Of course, UK politics has yielded many surprises in the past two years, so what might seem the right conclusion in a game theoretic framework in this context may not still be the ultimate outcome. Odds are however shifting in that direction.

With this backdrop, where do the markets go from here? In the event of a no- deal Brexit toward the end of this month, the market impact would be extremely negative. A soft Brexit is priced in, in our view. The possibility for a long delay and the rejection of a second referendum could see a push for new elections and fresh volatility.

In this Weekly, Radhika Rao examines in greater detail the macro implications of the ongoing saga. Philip Wee weighs in on the FX implications. Eugene Leow considers the rates and monetary policy scenario.

To read the full report, click here to Download the PDF.

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Radhika Rao

Economist – India, Thailand & Eurozone

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