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Theresa May Suffers Second Brexit Defeat

Karl Schamotta March 12, 2019

A revised Brexit agreement has been rejected by Parliament, marking another bruising defeat for Prime Minister Theresa May’s government. 242 Members of Parliament voted in favour, 391 against – a slightly lower margin of loss than in January, when the deal lost by a historic 230 votes.

As per speaker John Bercow’s instructions, no amendments to the government’s motion were voted on. Changes including a delay and a second referendum had been proposed.

Fears that legal restrictions embedded in the so-called Irish border “backstop” could keep the United Kingdom within the European Union trade remained the biggest bone of contention, despite a series of last-minute changes designed to alleviate concerns on both sides of the aisle.

In a last-ditch effort to save the arrangement, Mrs. May had agreed a set of “legally binding” exit provisions with European Commission President Jean-Claude Juncker last night – but in providing a legal opinion to Parliament this morning, Attorney General Geoffrey Cox crushed these provisions, saying, “the legal risk remains unchanged”. The lawyer characterized the amendments as unable to guarantee that Britain could unilaterally exit the customs union.

This doomed the deal, ensuring that hard-line Conservative Brexiteers and members of the Northern Irish Democratic Unionist Party were unlikely to support the Prime Minister. William Cash, a member of the pro-Brexit European Research Group, said, “In the light of our own legal analysis and others we do not recommend accepting the government’s motion today”.

In an impassioned speech given only a few hours ago, the Prime Minister said, “If this vote is not passed tonight, if this deal is not passed, then Brexit could be lost”.

In the days leading up to the vote, European officials attempted to characterize the decision as a make-or-break moment for the process, with German Chancellor Angela Merkel saying, “Clear, far-reaching proposals have been made that take into account the concerns of Britain and that seek to find answers to them”. Jean-Claude Juncker said, “It is this deal, or Brexit might not happen at all”.

May is now expected to announce a second vote, possibly for tomorrow, in which Members of Parliament will be asked if they support leaving the European Union without a deal.

This is expected to fail, clearing the way for a vote on Thursday on extending the exit process – likely for a period lasting several months – which is more likely to meet with success, but would require approval from the European Union.

The pound continues to suffer extreme volatility but remains above critical psychological support levels as we go to pixels – suggesting that currency traders continue to expect politicians to muddle through, ultimately delivering a compromise that keeps many of the United Kingdom’s current privileges intact.

Bottom Line: Barring a series of unfortunate events, an extension in the Brexit process looks increasingly likely. During this interregnum, Theresa May might attempt to narrow the margin of defeat through negotiation of yet another deal, but a second referendum or a general election remain distinctly possible – meaning that markets will continue to suffer extreme uncertainty emanating from the British Isles. The more the years and centuries change, the more they stay the same…

Karl Schamotta
Chief Market Strategist

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