Markets remain surprisingly calm despite chaotic week for Brexit

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03/15/2019 | 04:07 pm
Over the week, the British pound gained 1.80 percent against the dollar and 1 percent against the euro. This reflects the surprising confidence of investors that the EU and Britain will have an amicable divorce in the end, despite the various votes by MPs and the overall chaos that have characterized the past week.

After rejecting the scenario of a no-deal Brexit earlier, on Thursday, the British Parliament rejected the opportunity for a new referendum, and voted to postpone the UK's exit from the EU.

With 15 days to go before the Brexit, MEPs decided to postpone it by 412 votes to 202. With regard to the vote on a second referendum, 334 deputies voted against, and 85 in favor, almost three years after the June 2016 referendum that decided on Brexit.

The motion provides for a short postponement until June 30 if MEPs approve Theresa May's EU withdrawal agreement by March 20, which they have already rejected twice.

If the agreement is rejected again, the postponement will have to go beyond June 30 and will involve the organization of elections for the European Parliament in May. The 27 Member States of the European Union must still unanimously approve this request for postponement.

This scenario of a long delay would prolong the uncertainty that the United Kingdom has been facing since it voted to leave the European Union.

Calm before the storm?

Despite all this uncertainty, markets remain surprisingly calm. The FTSE 100 index has remained firm while the yield curve (10 minus 2 year) has essentially been unchanged. In a report, analysts at Jefferies note that “despite the Brexit uncertainty, examining the UK February factor returns it seems that UK equity investors have been largely indifferent to the outcome. Companies with positive earnings revisions led absolute & relative returns with price momentum coming in second but trouncing the field in excess returns (top minus bottom decile).”

It points out that “value and quality factors underperformed the benchmark but still scraped absolute gains. Overall revisions worked well in absolute terms but failed to generate positive excess returns. Small caps delivered negative total returns in February. Since the Brexit vote (June 2016 to February 2019) high beta stocks delivered very strong absolute and excess returns while small caps showed negative returns overall.”

It adds several graphs in the report that are quite enlightening, here is a selection:
 

But things could change as the next days are gearing up to be some of the most dramatic in the Brexit saga so far.  May’s agreement could succeed on a third vote as some MPs will want to avoid a long extension…

Romain Fournier
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