Market players prepare for next step after May's Brexit vote defeat

After Britain witnessed the biggest defeat for any government in modern history in the voting down of Theresa May’s Brexit deal, finance professionals are positioning for what’s next.

Many believe there’s an increased chance Britons will get to vote again in a national ballot on Brexit -- a repeat of the 2016 vote that triggered May’s rise to the helm in negotiating the U.K.’s exit. Below, lightly edited insights from market strategists, investors and analysts on what happens now.

“The reason why the markets seem kind of calm about it all is it takes away the option of just crashing out,” David Blanchflower, a former policy maker at the Bank of England and now a professor at Dartmouth College in New Hampshire, told Bloomberg TV. “They have to defer, they have to delay. The prospects of a second referendum are rising and prospects of no Brexit at all are rising.”

Evercore ISI, Krishna Guha

Near term this may mean higher volatility, higher uncertainty and therefore consistent with sterling, which fell earlier in the day, staying weak. Longer run, it increases the likelihood of a softer Brexit (via a new effort to find a cross party consensus) or no Brexit at all (via a second referendum) more than it increases the likelihood of a chaotic No Deal Brexit.

In the interim, Brexit delay looks likely. This could even end up being positive for U.K. risk. Put differently, the probability distribution is shifting toward more of a barbell, in which both upside and downside ‘tail’ risks now command most of the probability mass, but in our view the upside tail (better than May deal from a market perspective) has increased more.

Aberdeen Standard, Stephanie Kelly

I’d expect sterling to be volatile until the result of the no-confidence vote is known. With the DUP saying they’ll back the Conservatives, the no-confidence vote is dead in the water unless there’s a big rebellion within the Conservative party.

If May wins the no-confidence vote then we are going to essentially be in the same place as if the vote had happened four weeks ago but with a tighter timeline to Article 50 ending.

Markets will be choppy in coming days but it’s worth remembering that nothing fundamental has changed overnight. The wisest thing for investors to do in the short term is nothing.

Crossbridge Capital, Manish Singh

If she makes the mistake of going and forming a single market, customs union agreement with Labour, and tries to pass it that way, she might lose support of the Tories. My base case remains the same -- the U.K. will leave with a deal, not without a deal. Right now, it comes back to the EU.

Credit Suisse, Sonali Punhani

Our scenario remains that a soft Brexit deal is more likely than the U.K. exiting without a deal. But the path to such an outcome is likely to involve further U.K. domestic political stress and uncertainty in the next few days and weeks.

Merian Global Investors, Richard Buxton

If a deal can ultimately be agreed, we may see the Bank of England hike policy rates up to three times over the course of 2019. Conversely, if the U.K. does leave the EU without an agreement, I would expect the Bank’s Monetary Policy Committee to move rapidly to cut rates from their already-low levels. The resumption of monetary stimulus, in the form of quantitative easing would in my view, be a possibility.

Daiwa Capital Markets, Paul Kitney

The vote “actually wards off one of the existential risks that I had seen in equities, particularly in emerging markets. That would have been an ill-proposed deal being accepted, and then there being a flight to quality into the U.S. dollar as a result. That’s being put on hold at the very least.

What it also shows is that the focus is on the economics. We’re seeing a bipartisan approach to looking at the implications of Brexit on the U.K. economy. Particularly in the backdrop of a weaker Eurozone, a weaker U.K. economy, this has becoming much more important. And ultimately we’re likely to see a better outcome even if that outcome means no Brexit at all.”