Citing a four-century old law, UK House of Commons Speaker John Bercow on Monday called into question a third parliamentary vote for UK Prime Minister Theresa May’s twice-rejected Brexit plan on the grounds that it was the “same in substance” as a previously tabled motion. GBPUSD declined as much as 0.8% intra-session, though it has since recovered most of the lost ground.
The latest twist leaves the ultimate Brexit outcome just as uncertain, but we do not currently expect large spillover into global markets:
- The surprise decision by the Speaker adds yet another complication for May in securing agreement for her Brexit deal, and increases the chances of a significant delay in the UK's exit from the EU beyond its self-imposed 29 March deadline. Until some clarity emerges, we do not advocate taking directional views on sterling and advise hedging downside risks, but we note that sterling has tended to react positively to events that point to a substantial delay.
- Heightened uncertainty in the UK has not undermined global risk-on sentiment. The S&P 500 ended the day 0.4% higher, and global stocks last week enjoyed their strongest five-day rise since November. We believe the direct impact of Brexit on MSCI EMU earnings, the market most closely tied to the UK, is likely to be limited regardless of the outcome. Only 5% of MSCI EMU's revenues are directly linked to the UK, and only a handful of Eurozone and Swiss companies have UK revenues that account for more than 20% of total revenues.
- No deal would be a slightly bigger deal for European growth. Brexit uncertainty has already been among the factors depressing Eurozone growth over the past year. We think current Eurozone economic forecasts already account for a transition deal or a delay of Brexit beyond 29 March. Although a hard Brexit is not our base case, we estimate that it would shave about one-quarter of a percentage point off 2019 Eurozone GDP growth. With the European Central Bank (ECB) now only expecting growth of 1.1% this year, this potential impact is not immaterial.
Against this backdrop, we remain overweight global equities and neutral on Eurozone equities. We underweight UK equities against emerging market dollar-denominated sovereign bonds due to their less certain risk-adjusted return outlook over the longer term.