Weekly Investment Insights – Brexit – Is the end of March still likely?

Highlights

• May’s second defeat in the Lords has added to uncertainty surrounding the  triggering of Article 50, pressuring the GBP.
• In all likelihood the “Brexit Bill” should gain approval during the next week setting the stage for an official announcement.
• The risk comes from a rebellion in the Commons that could see government credibility damaged or even a snap election

May suffers second defeat

Theresa May’s EU Notification of Withdrawal Bill (the Bill) suffered its second setback in as many weeks on Tuesday, as the House of Lords voted for the inclusion of a yet another amendment to the landmark legislation. While the first centred on guaranteeing the rights of approximately 3 million EU citizens working in the UK, the second change would allow Parliament to have a direct say on the final terms of a future Brexit deal. In the meantime, the GBP has fallen to seven week lows against both the US Dollar and the Euro (see Figure 1) as investors continue to express concern over the imminent (in theory) trigger of Article 50. The question now is what the timeline will be of May actually triggering Article 50 given recent events and whether a March-end deadline is still realistic.

Figure 1: Uncertainty pushes GBP lower

(click to enlarge)

Next step and risks

At the start of next week (March 13th) the House of Commons is expected to vote on the amendments put forward. The most likely outcome is that with the government’s 17 member working majority the amendments will be overturned, sending the Bill back to the House of Lords. The House of Lords can vote for additional amendments (different from before) and begin a process known as “ping pong” with the lower house. Political pundits feel this is unlikely though as the Lords do not want to be viewed as frustrating the referendum result and in turn the will of the British public. Therefore, in the earliest case we could see May trigger the Article as early as next week.

However there are risks involved. Pro-EU backbenchers in the Conservative Party could coordinate to prevent amendments being implemented, prolonging the process further and creating greater uncertainty. This could see the Sterling move lower as it is clear that the market needs clarity over future proceedings. In the aftermath of the second vote in the Lord’s, the government took the swift steps of removing the former Conservative deputy prime minister Lord Heseltine from his post as government advisor, sending a signal that rebellion will not be tolerated.

Potential Dates

In any case, should the Lord’s approve the Bill in the early part of next week May will have to act tactfully in determining a trigger date. On the 15th March is the Dutch general election where controversial populist Geert Wilders is leading in the polls and then immediately after (17th-18th) is the Scottish National Party (SNP’s) spring conference where the increasingly  disillusioned political party could announce a second independence referendum. The key date to avoid is the EU Summit to be held on March 27th, which commemorates the 1957 signing of the Treaty of Rome. Should May overshadow this event with the UK’s formal notification of departure, could spark a hostile reaction, something that will likely be reflected in an uptick in the EUR/GBP currency pair.

Investors wishing to express the investment views outlined above may consider using the following ETF Securities ETPs:

Currency ETPs

GBP Base

ETFS Long EUR Short GBP (GBUR)
ETFS Short EUR Long GBP (URGB)
ETFS Long USD Short GBP (GBUS)
ETFS Short USD Long GBP (USGB)

USD Base

ETFS Long GBP Short USD (LGBP)
ETFS Short GBP Long USD (SGBP)

3x

ETFS 3x Long GBP Short EUR (EGB3)
ETFS 3x Short GBP Long EUR (GBE3)
ETFS 3x Long GBP Short USD (LGB3)
ETFS 3x Short GBP Long USD (SGB3)
ETFS 3x Long USD Short GBP (USP3)
ETFS 3x Short USD Long GBP (PUS3)
ETFS 3x Long EUR Short GBP (EUP3)
ETFS 3x Short EUR Long GBP (SUP3)

5x

ETFS 5x Long GBP Short EUR (EGB5)
ETFS 5x Short GBP Long EUR (GBE5)

Basket

ETFS Bullish GBP vs G10 Currency Basket Securities (LGBB)
ETFS Bearish GBP vs G10 Currency Basket Securities (SGBB)

Important Information

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