The Brexit saga took another twist last night as MPs rejected the prime minister's EU exit plan, but what happens now, and how will it impact investors? Lee Wild answers your questions here.
What just happened?
After two years of negotiations, and with just two months before the deadline, Prime Minister Theresa May's Brexit plan was soundly rejected by 230 votes on Tuesday night, a record margin for a sitting government.
As well as Labour MPs and Northern Ireland's Democratic Unionists, 118 Tory MPs rebelled against their leader's blueprint for the UK's withdrawal from the European Union on 29 March.
For many MPs, a key issue has been the complicated situation with Northern Ireland and the so-called 'backstop'. After Brexit, Northern Ireland and the Republic of Ireland would be in different customs unions, but a return to a physical border between the two countries is not accepted by either side. A 'backstop' will be implemented only if no alternative to a hard border can be found, but assurances that this would only be a temporary situation have not convinced many MPs.
Why is it important?
An orderly exit from the European Union is essential given the serious implications of Brexit for the UK economy, jobs, the local currency and financial markets.
Maintaining a favourable trading relationship with Europe is highly desirable given that the EU is our largest trading partner by far, responsible for 44% of our exports worth £274 billion in 2017. UK companies already face extra admin as they adjust to changes in trading rules, and a deal that suits both sides will help smooth out the transition.
A no-deal Brexit is the least-preferred outcome given the immediate economic damage that comes with it. In this situation, tariff and other barriers would severely hamper trade with Europe, both in terms of imports and exports. Many European and other international companies would move some, if not all of their European operations to other countries within the EU, just as is already happening in the financial services industry.
New trade deals outside the EU will take time to negotiate and implement, leaving UK importers and exporters at a significant disadvantage. In the short run, as the UK drops out of the EU, we may in fact lose many of our EU-related trade quotas with other trading blocs. The EU will insist that Britain must still pay its portion of agreed EU expenditure, leaving diplomatic relations severely strained, to the detriment of any UK company doing business in Europe, or European company doing business in the UK.
What happens next?
Labour has tabled a vote of no confidence against the prime minister, which might typically have triggered her resignation and a General Election. However, that seems unlikely just now, giving Theresa May time to present an alternative to parliament. It also provides an opportunity for those factions in Labour in favour of a second referendum to speak out, something which was seen as impossible before their leader finally launched a no-confidence motion.
Theresa May has three working days to come up with a Plan B. She must court opinion among opponents of the first deal and will have to make amendments if a second vote is to succeed. For now, Mrs May remains insistent that the only choice she will countenance is between her deal or a no deal Brexit. That may have been a reasonable negotiating position before last night’s vote, but events could change very quickly in the days and weeks ahead.
Mrs May could request an extension of Article 50 beyond 29 March to give extra time to negotiate a deal acceptable to the majority of MPs in parliament. There is also the option to withdraw Article 50 and the entire Brexit process.
The finely balanced positions of Remainers and Brexiteers were well illustrated last night by the views of both Jacob Rees Mogg and Dominic Grieve. The Brexiteers believe that a hard Brexit is now within their grasp, while the Remainers are confident that a no-deal Brexit can be avoided. As Mrs May's position becomes increasingly peripheral to the ultimate path which Brexit may take, these two sides may become increasingly polarised in the weeks ahead.
How does it affect me?
A chaotic Brexit would heighten concerns around foreign trade, economic growth, jobs and investment in Britain by companies based both in the UK and overseas.
The immediate impact on financial markets has been limited. Ahead of the vote last night, sterling fell below $1.2700 and FTSE 100 futures prices rose above 6,940. On confirmation of May's defeat, the pound headed back to $1.2850 and FTSE 100 futures fell below 6,880.
This morning, the increased likelihood of either a 'soft' Brexit or no Brexit at all has the FTSE 100 down over 40 points at 6,850, largely as a result of the rebound in sterling versus yesterday's lows. Overseas earners are down as the stronger pound means profits made in dollars or other currencies are worth less when translated back into sterling, most companies' reporting currency.
Domestic stocks are in favour as a softer Brexit outcome is expected to limit the impact on the UK economy and companies that earn most, or all of their money here. Housebuilders like Persimmon (LSE:PSN), Barratt Developments (LSE:BDEV) and Taylor Wimpey (LSE:TW.) lead the risers. Retailers Marks & Spencer (LSE:MKS) and Next (LSE:NXT) are up too, as are high street banks The Royal Bank of Scotland (LSE:RBS) and Lloyds Banking Group (LSE:LLOY).
Implications for the pound and for UK-listed equities from the range of Brexit outcomes could be more extreme. In the event that Brexit does not happen, it is thought sterling could trade above $1.40 again. If we end up with a ‘hard’ Brexit, the pound could move towards parity with the dollar.
Smaller companies especially are likely to track the fortunes of sterling as their prospects depend very much on a strong UK economy and favourable Brexit outcome.
Either outcome is very much still possible, and without further clarity on the shape of a final deal, financial markets are expected to remain volatile.
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