UK: Another Brexit extension is still the most likely outcome

Morten Lund, analyst at Nordea Markets, suggests that they do not believe the Brexit deadlock will break anytime soon.

Key Quotes

“Well, there are still options at hand which Johnson has otherwise ruled out: Seeking another extension, revoking article 50 or a second referendum. The two latter options are obviously utopia under BoJo’s leadership, but we still find another extension likely.”

“The reason is simple. If BoJo does not seek an extension, it will end up with a general election in which he will most likely lose his newly found power. Moreover, there is an imminent risk that the new PM will be Jeremy Corbyn – a scenario, which the Conservative party members fear above all. Hence, the Tory members would rather – in order to deliver Brexit - “sacrifice” Scotland, the economy, Northern Ireland and their own party before seeing Jeremy Corbyn becoming prime minister.”

“Therefore, when BoJo finds out that it is not possible to deliver a “new deal” within a few months and a no-deal is unlikely without triggering a general election, then why not ask for more time to either try to negotiate a deal while keeping the PM post or (from his perspective) hope the EU will reject an extension? At least, he will not be the first one to follow such a strategy, despite having ruled it out a few months earlier.”

“So all in all, an extension remains our main scenario – either via BoJo seeking it himself or via a general election (it takes at least ~8 weeks from calling an election to holding one). We expect an extension until March 2020. This would be in line with what the vast majority of the EU Council already wanted at the emergency EU summit in April (only Macron vetoed against the decision).”

“Next in line, we judge that both the odds of Bojo passing a deal before the October deadline (aka. bringing in the mojo) as well as the risk of a no-deal are around 15-20%.”

“In the end, we expect a deal somewhat close to May’s to pass.”

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