A hard Brexit beats a clueless Brexit

Capital markets seem content with UK Prime Minister Theresa May’s election confidence on the back of commanding poll data but investors be wary of shocks on polling day. A move meant to shore up May could instead lead to more uncertainty.

  • By Sam Kerr
  • 18 Apr 2017
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Before Tuesday's announcement of an early election on June 8 the mood in the markets had largely come to accept the coming hard Brexit, and to think instead about the practicalities. Most firms still believe that the UK will leave the European single market with some sort of transitory trading arrangement in place before a firmer deal can be struck at a later date.

While this scenario isn't ideal, the nature of the UK’s stringent financial regulatory regime and importance of London to some of Europe’s most important financial institutions, means that some kind of mutual recognition remains possible, at least in the medium term. The election announcement doesn't change that. 

Many in the markets are now backing Theresa May to increase her House of Commons majority, giving more certainty to Brexit negotiations. There is an argument that more freedom of manoeuvre for May means tougher demands from the EU side, but with Tuesday’s rise in sterling, it looks like the markets have more confidence in the UK.

Some even speculate that a larger Tory majority might lead to a softer Brexit stance, given that the PM will be less beholden to the 30 odd hard line Eurosceptic MPs who could torpedo any show of pragmatism in a transitional or final EU trade deal.

It also means that the next election following this year can be postponed to 2022, rather than 2020, a year which could be right in the middle any transition period, and probably in the middle of negotiations on a final trade deal.

This logic holds as long as May’s commanding position in the polls leads to more Conservative MPs sitting in the House of Commons on June 9than today, but capital markets shouldn’t discount the potential for a shock on June 8th.

With 48% of the electorate having voted to remain in the EU during the referendum, a resurgence in the Liberal Democrats is a distinct possibility given the party’s pledge to oppose May on Brexit.

The party won a recent by-election in Richmond Park on an anti-Brexit platform and intend to fight the current election on the same grounds, while the Tories largely won their majority in 2015 at the expense of the Lib Dems.

One investor said the uncertainty didn’t help markets as there had seemed to be a consensus before on what the UK government’s plan was on exiting the EU.

“Obviously May is going for a super majority in the Commons but the concern for us is that there are enough angry Remainers out there to punish the Tories and reward the Lib Dems,” he said. “Labour will obviously lose some seats but if we have another coalition it will be very different to how it was before.”

If the Liberals retake their old heartlands as well as Tory seats in London, which remains decidedly pro-EU, then the Conservatives must make good on their poll lead and take a large proportion of seats from the Labour Party.

Given the tribal, and sometimes generational, hatred for the Conservatives in many Labour heartlands this is far from guaranteed.

If the Liberal Democrats gain and Labour manage to hold, there is a small possibility that the Conservatives are either returned to government with a smaller majority, or none at all given the UK’s first past the post electoral system.

This would torpedo any consensus on Brexit, leaving the UK rudderless and without a firm negotiating position as the clock continues to tick towards the UK exiting the EU.

If this happens even a ‘Hard Brexit’, with all the certainty that implies, is more manageable for markets than no idea about Brexit at all.

  • By Sam Kerr
  • 18 Apr 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 13 Mar 2017
1 JPMorgan 94,925.33 384 8.39%
2 Citi 87,531.58 331 7.74%
3 Bank of America Merrill Lynch 84,341.49 288 7.46%
4 Barclays 75,288.19 241 6.66%
5 Goldman Sachs 68,504.71 208 6.06%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 14 Mar 2017
1 Bank of America Merrill Lynch 10,650.87 23 11.13%
2 Deutsche Bank 8,169.49 17 8.53%
3 HSBC 6,243.46 23 6.52%
4 Citi 4,355.35 13 4.55%
5 SG Corporate & Investment Banking 4,273.37 17 4.46%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Apr 2017
1 JPMorgan 6,719.07 26 8.43%
2 Deutsche Bank 5,994.13 30 7.52%
3 UBS 5,678.69 26 7.12%
4 Citi 4,920.31 35 6.17%
5 Goldman Sachs 4,802.16 24 6.02%