Parliamentarians voted 432 to 202 against Prime Minister Theresa May's Withdrawal Agreement, inflicting the worst defeat on a British government in modern history.
The unexpectedly large margin by which May's deal was rejected sent the UK into uncharted territory, raising the possibility of a general election or a second referendum on EU membership. A vote of no-confidence in the government is now scheduled for Wednesday, and many commentators have suggested the UK is now heading for a constitutional crisis.
But we believe it is still too early to draw conclusions. The Brexit process still has some way to play out.
- Numerous Brexit-supporting Conservative MPs and the Democratic Unionist Party, which supports the Conservative Party in Parliament, were quick to declare their support for the government so it seems unlikely that the no-confidence motion will succeed.
- In her statement to the House following the vote, May said that she is willing to listen to all sides of the House before deciding how to proceed. The initial reaction from the EU was to announce that the Withdrawal Agreement will not be reopened. Time will tell if this proves to be case, but it is likely that May will return to Brussels this week to pursue this option.
- If May does not manage to secure support for her preferred option of leaving the EU with a Withdrawal Agreement, then all other options are back on the table. In our view, while still possible, the risk of the UK leaving the EU on 29 March without a deal is fading as Parliament has shown its desire to prevent such an outcome (see Brexit Brief: Taking back control, 11 January). All the other options, including a renegotiation of the deal toward a softer, Norway-type arrangement, a general election or a second referendum will unquestionably require a delay to the 29 March leaving date.At this stage, we do not advocate taking directional views on sterling and UK assets. The reaction of the pound following the vote would suggest that markets are not currently increasing the risk of an adverse outcome. For the time being, we expect that uncertainty will remain high and UK markets will stay volatile. Within portfolios, exposure to sterling-denominated assets should be maintained at benchmark levels until more clarity emerges.