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Market Says NO! "No Deal"

The venerable Ken Clark, Father of the House, spoke for many inside and outside the Commons when he asked whether there was anything more ‘unhelpful, irrelevant, or irresponsible’ than a Tory leadership contest right now. Various business organisations clearly share his his vexation as they wind up their criticism of the politicians. In contrast, Figure 1 shows that not only were investors unfazed yesterday but instead seem to be recovering from a mild panic attack over the prospect of a Corbyn Government. The more domestically-oriented FTSE 250, which has been struggling recently over Brexit even more than the FTSE 100, had a much happier day yesterday in gaining 1.9%. The pound also found support after two turbulent days, albeit not quite enough to regain the $1.27 floor of recent weeks. The Brexiter wing of the Tory Party has been foiled in its coup to depose Mrs May and get one of their own on the ballot sheet for Tory Party members, who could probably have been relied upon to vote for a ‘no dealer’. As Prime Minister, the new leader could in theory have taken the UK out of the EU without consulting Parliament. Unless, of course, a No Confidence vote was passed, which would have probably happened despite DUP support, as no opposition MP would have wanted to rescue a Tory Prime Minister and at least 20 Tory MPs would seem willing to put ‘country before party’. Such a vote may yet happen but not right now as Mrs May battles on with her deal. However, the House of Commons arithmetic remains against her with 300 plus MPs (Labour, SNP, Lib Dems and at least 10 Tory rebels) favouring a Second Referendum as the route to Remain, 120 plus irredentist Brexiters (including a handful of Labour MPs) leaving around 200 (including 10-15 Labour rebels) supporting Mrs May’s deal. There is a chance, as I have previously suggested, that Mrs May in self-sacrifice will eventually propose that the UK remains in the EU, which would certainly draw fire within both Party and country away from her successor as Tory leader. A majority in Parliament may emerge for a Second Referendum but probably only for a choice between Mrs May’s deal and remaining. Overall, the chances of  ‘no deal’ have reduced further but the drama (farce?) looks set to continue. Yesterday’s vote was a reminder that the governing party is deeply divided. The shadow of Brexit may now be replaced by that of Mr Corbyn, holding back the pound for a while at least and inhibiting some investors from snapping up undoubted bargains amongst UK stocks.  

Alastair Winter Chief Economist

Figure 1 | FTSE 250 | Source LSE

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