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Parliament Smashes Boris Johnson’s Early Election Gambit

Karl Schamotta September 10, 2019

In the latest in a series of dramatic turns, the British Parliament has decisively defeated Prime Minister Boris Johnson’s attempt to call an October 15 election. Mr. Johnson needed a two-thirds majority of more than 434 votes to trigger a snap poll – but got only 293.

The government will now be suspended until October 14, meaning that an election cannot be held before November at the earliest.

The victory for opponents of a hard Brexit helped the pound sustain gains that have seen it climb almost 300 basis points from the post-2017 low reached last week. Implied volatility levels against the euro and the dollar are falling as we go to print, and look likely to drop further as markets reprice risk.

Beginning roughly two weeks ago, Mr. Johnson had attempted to force a sharp exit from the European Union by proroguing (suspending) Parliament, hoping that his government could push a withdrawal

After the vote, the embattled Prime Minister said, “This government will press on with negotiating a deal while preparing to leave without one. No matter how many devices this parliament devises to tie my hands I will strive to get an agreement in the national interest”. Last week he said that would rather be “dead in a ditch” than to keep the United Kingdom within the economic and political bloc beyond October 31.

This statement puts him on course to challenge a law, passed by royal assent earlier in the day, that is designed to block a no-deal Brexit. The legislation, supported by a broad coalition of lawmakers, is intended to compel Mr. Johnson to request another extension if a withdrawal agreement is not in place before the October 31.

An agreement remains possible, but looks unlikely after today’s meeting with Irish Prime Minister Leo Varadkar failed to end in any substantive changes on the so-called “backstop” plan – a proposal designed to keep the border between Ireland and Northern Ireland open. Hardline Brexiteers fear that the backstop would put the relationship between the UK and the EU in legal limbo for years, while their opponents see it as a bandage solution that would simply paper over deeper problems.

In recent days, talk has emerged of several other stratagems, including breaking the law, seeking a judicial review, calling a no-confidence vote in his own government, or resigning. But with 21 Tories now ejected from the party, the resignations of Amber Rudd and his brother Jo Johnson, and opposition to his plans increasingly clear across the political landscape, his room for maneuver is limited. The likelihood of a departure from the EU before 2020 has fallen precipitously.

Taken in sum, the latest episode of Downturn Abbey will put additional strain on the British and European economies for months to come. But the disaster that a cliff-edge Brexit once threatened has been averted. For now.

Karl Schamotta
Chief Market Strategist