She’s teflon – now step off, you haters, you.
Not really. Theresa May survived a party confidence vote, but the final tally was 200-117, a closer margin than some expected.
This solves pretty much nothing, but at least it keeps sterling from crashing. The pound rallied hard all day long and while the uncertainty around Brexit will persist (and while the relatively narrow margin probably doesn’t bode well), I suppose we can write off some kind of dramatic, destabilizing FX moment.
(Bloomberg)
As far as where we go from here, this just puts everyone back in the same spot they were in to start the week. That is: Without enough support to cram the existing (and, according to Brussels, the only possible) Brexit deal through Parliament. It also seems as though the vote tally further undermines May’s position.
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“If she wins, the UK avoids the chaotic process of finding a new leader, but the fundamentals don’t change”, Credit Suisse wrote on Wednesday, adding that May is “unlikely to secure substantial changes from the EU on the deal this week and the vote on the deal is still likely to be difficult to win in the UK Parliament.”
“Even a slender majority in support of May would bolster her by giving her 12 months of immunity from any more confidence votes in her leadership, nevertheless, if she only scrapes through, we would expect her position to be weakened”, BNP says, before warning that “she might still face confidence votes in the government as a whole [and even] if she survives as party leader, it will not improve the chances of the Brexit deal passing if and when presented to Parliament.”
In other words, the deal as it currently stands is going to be rejected. So, all of this for nothing, really, although it made everyone pay attention to UK politics for the day, an experience that folks are hoping they never have to suffer through again.
Goldman has a more nuanced take that’s well worth reading if you can find it. Essentially, the bank argues that this week’s chaos was necessary and actually reduces tail risk. Here’s a quick excerpt:
In our view, the net effect of the latest developments reduces the probability of a disorderly Brexit and increases the probability of a reversal of Brexit itself. The distribution of Brexit outcomes has been wide, with fat tails, for some time. We see that distribution as now being more skewed in a ‘soft Brexit’ direction. After all, the Eurosceptic faction of the Brexit debate holds much less sway across Parliament at large than its influence within the Conservative Party would suggest. If an emboldened PM May were to lose the ‘meaningful vote’ on her tweaked Brexit deal in mid-January, we believe subsequent Brexit legislation would be more likely to reflect the preferences of the cross-party coalition of MPs seeking closer institutional alignment with the EU than the preferences of Conservative backbenchers with the appetite for a more abrupt EU departure.
The bank goes on to say that while May could of course still face challenges from Labour, Wednesday’s developments are “emblematic of a central feature of the longstanding conundrum in the House of Commons: Tail risks need to intensify to discern the true tolerance of dissenters.”
All in all, May’s deal doesn’t have to be everyone’s “first-best Brexit”, Goldman writes – as long as it’s “everybody’s second-best solution.”
For whatever this is worth (which may be absolutely nothing, but I’m going to toss it out there anyway just so someone can call me a moron), GBPUSD 2M vol. is trading at the highest premium to 1M since Brexit, as the tenor captures the new vote and also a BoE meeting.
(Bloomberg)
