Why investors can’t get too excited about the new Brexit deal
The British pound and UK stocks shot up on news that UK Prime Minister Boris Johnson had clinched a new Brexit agreement with the European Union. Then the political reality set in.
Johnson still needs to get his deal through a special session of the UK Parliament scheduled for Saturday. Opposition parties and a group of lawmakers from Northern Ireland say they won’t support the agreement, raising serious doubt about whether Johnson can succeed where his predecessor, Theresa May, failed.
“Johnson has a chance, but it is going to be tight,” Kallum Pickering, senior economist at Berenberg, said Thursday in a note to clients.
May tried three times to get UK lawmakers to green-light her EU withdrawal agreement, without success.
“The parliamentary arithmetic is not in Boris [Johnson’s] favor at this point in time,” said Craig Erlam, senior market analyst at Oanda, a currency broker. He believes this will limit any exuberance among investors.
The pound initially raced toward $1.30 on Thursday on the news that Johnson had secured a deal that could prevent Britain from crashing out of the European Union on October 31 without arrangements in place to protect trade and the economy. But the currency quickly gave up those gains and was trading down 0.2% near $1.28 by 9:45 am ET.
UK stocks also got an early boost. The FTSE 250 index, which is made up of mid-size British companies, was 1.2% higher at one point before easing back to stand 0.4% higher. The FTSE 100, which is made up of large multinational companies that tend to benefit when the pound weakens, gained as much as 1%.
Should Parliament pass the agreement negotiated by Johnson, analysts think the pound could rally toward $1.35 or even $1.40. Even in this case, euphoria may be limited. Johnson’s deal is expected to put a lid on growth by erecting new trade barriers, which would hurt business operating in Britain.
What looks more likely: Johnson will be rebuffed, forcing him to ask the European Union for another extension. This could be followed by an election, or a second Brexit referendum. Both would spell yet more uncertainty for markets.
“We think that probably in terms of sterling gains, this is it,” said Petr Krpata, a foreign exchange strategist at ING.
For investors, an election is a tricky proposition. Johnson could campaign on the merits of his new deal, but he could also revive threats to sever ties between Britain and its biggest export market without a deal to safeguard trade.
“‘No-deal’ risk has come down considerably,” Erlam said. “It hasn’t gone away all together.”
On the other side of an election is Labour’s Jeremy Corbyn, whose leftist policies such as nationalizing certain UK industries are unpopular among investors — though his program may be better for the economy than a “no-deal” Brexit.
In the meantime, markets are poised to remain volatile.
