Tory Brexiteers likely to be galvanised by Euro parliament results

The results mean the next Conservative Party leader could veer towards a harder stance on Brexit, with implications for sterling and UK stocks.

The European Parliament elections produced mixed results in the UK and do not seem to offer a clear path out of the current Brexit limbo.

Nigel Farage’s Brexit Party came first, while the Tory (Conservative) party suffered heavily. This is likely to induce a new Tory leader to adopt a harder stance on Brexit in the coming months, as the party faces a prolonged ‘existentialist’ crisis over the issue. At the same time, the results showed the resilience of pro-Remain forces among the smaller parties, although they remain very divided.

We now think that the risk of a hard Brexit by the 31 October deadline is high (40%), although our central scenario is that we will see a further extension of that deadline, premised on the possibility of an early general elections in the UK in 2020 (60%). We see no reason why this extension would not be granted, especially if the UK finds yet another ‘excuse’ for postponing Brexit, such as the need to obtain voter consent to re-open renegotiations on the withdrawal agreement.

From an asset class standpoint, the prospect of a government more inclined towards a hard Brexit and of a parliament with limited power to counter it should weigh on sterling in the short term. However, the medium-term prospect of a general election or a second Brexit referendum should limit sterling’s downside as it could lead to a softer Brexit (or no Brexit at all). The potential formation of a government built around a grand coalition of parties against a hard Brexit would reduce the scope for far-reaching market-unfriendly initiatives.

As for UK equities, they should benefit somewhat from a weak pound in the near term.

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