Despite a last minute attempt by U.K. Prime Minister Theresa May to secure additional commitments from the European Union (EU) on the Irish backstop, the U.K. Parliament voted down the Brexit deal for a second time. With little appetite for a chaotic departure from the EU, Members of Parliament (MPs) also voted against leaving without a deal. British lawmakers voted to extend Article 50 — the statutory act by which the U.K. triggered the two-year timeframe to voluntarily leave the EU.

 Market reaction was in line with expectations following both a vote against a “no deal” exit and a vote to delay Brexit. With improved sentiment, most Eurozone bond yields moved slightly higher, the British pound sterling was up against the U.S. dollar and the euro, and European stocks also rallied. Now, investors are left deciphering yet another set of possibilities in the coming weeks and possibly months.

What’s Next?

Following the motion to extend Article 50, a request to the EU will be made. Parliament will vote again by March 20 on the withdrawal agreement that will determine the length of the extension. If passed, the government could request from the EU a short extension, but if it does not pass, a longer extension may result.

 Regardless of whether Parliament requests a long or short extension, the EU must hold its own vote to allow or disallow an extension — with all 27 nations agreeing. If the EU allows an extension, we could see either another vote on the Prime Minister’s deal or a vote on a new negotiated proposal. Either of these scenarios is likely to result in a “soft” Brexit. However, there still exists the possibility of a second referendum, general election or no deal. If either extension request is declined by the EU, then Brexit occurs with or without a deal.

 

No Change in Our View

The outcome of this week’s votes does not change our fundamental views of the U.K. or the Eurozone. Although lawmakers avoided a “hard” Brexit, at least for the time being, uncertainty still exists as the EU needs to agree to the extension and Parliament still needs to find a way to pass a deal.

 At this stage, we continue to believe that a deal will eventually get done. But without knowing details of what a final deal may look like or what it may mean for economic growth, we could see greater volatility in equities and currency markets in the coming weeks and months.

 We remain neutral on the U.K., and maintain our neutral weight to developed international equity as the backdrop of slower growth is further complicated by politics. We recommend a bias toward U.S. equities within a well‑diversified portfolio as it should help provide investors with the best balance between risk and reward.

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