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What happened?
UK Parliament held two key Brexit votes today.
UK Prime Minister Boris Johnson won the first vote, support for the Withdrawal Agreement Bill in principle, by a 30-vote margin (329 vs. 299).
But he lost the second vote, the “programme motion” to fast-track Brexit law, by a 14-vote margin (308 vs. 322).
Labour opposition leader Jeremy Corbyn was, not surprisingly, harshly critical and called on Johnson to continue to work on alternatives, which would essentially be more of the same.
Johnson said the UK should accelerate preparations for a no-deal Brexit. He'll speak to the EU about its intentions and called for a pause in the progress of the Withdrawal Agreement Bill. He did not immediately call for an election, as some thought he would.
As it stands right now, the default outcome is still for the UK to exit the EU on October 31 with or without a deal.
How did the market react?
The pound (GBP) fell, but due largely to the current level of uncertainty, only by about 0.50% versus the US dollar. Trading volumes were reportedly light in the move lower. There was more activity in the FX options market, with hedge funds unwinding long GBP call options. Going into today’s votes, the FX options market had seen more bullish trades than the GBP cash market.[1]
What to watch
Now we wait to hear from the EU. The press is reporting that the EU’s Donald Tusk will recommend the EU’s 27 member states accept the UK’s request and grant them the extension. EU parliaments have to vote unanimously for an extension. Watch France—it could pose a risk to an extension.
If Withdrawal Agreement Bill progress resumes, it will still be subject to amendments, such as a confirmatory referendum, a customs union or a two-year extension to the transition period (which currently ends December 2020), all of which would have implications for the bill’s final vote.
And there is always imminent election risk.
So we’re still in limbo, for now.
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[1] This indicates buyers of GBP call options, who expected the currency to strengthen, sold some positions given the new developments. Call options entitle the holder the right, but not the obligation, to purchase an agreed amount of an underlying asset at a certain time for a certain price.
Market conditions are extremely fluid and change frequently.
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