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A Softer Brexit After June Election? Not Necessarily Says BofAML's Wood

 

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Theresa May’s decision to call an early election will probably increase the possibility of a softer Brexit, supporting a better outlook for the economy, argues Bank of America Merril Lynch's (Baml's) Robert Wood in a recent note.

“Given the polls, this event does not create radical new uncertainty for the UK. If anything, it removes uncertainty,” said Wood, who points to a massive lead for the conservatives in the most recent polls.

The election is a “foregone conclusion” and should lead to large – potentially three digit – majority for the conservatives based on current polls.

“Betfair markets put a 25% probability on a Conservative majority of 100 seats."Electoral Calculus" forecast, based on polls between 11 and 18 April, that PM May would win a majority of 134 in the House of Commons, up from 16 currently,” said Wood.

This will be big enough to ensure she is not held to ransom by one faction within the party, which is currently the case, given 50 or so MP’s back a very hard Brexit.

“First, a large majority would leave PM May less reliant on any one faction within her party and therefore better able to strike compromises with the EU to avoid the worst case scenario of no Brexit deal at all,” writes the Baml analyst.

Despite putting a positive spin on the impact of a Conservative landslide victory, Baml’s base case scenario remains for a ‘Hard’ Brexit, only now not quite so hard as before.

Wood still sees May upholding her key negotiation ‘red-lines’ which include immigration control, freedom from jurisdiction of the EU courts and allowing the UK the ability to sign its own trade deals with whoever it chooses.

Indeed it seems difficult to see how she can water these down much, given they are fairly equivocal.

Quite apart from what the EU thinks of these demands and how flexible they will be in response to them, Wood does not expect May to soften the lines very much even if she gets a bigger mandate.

It appears the majority of people who plan to vote Tory do not wish them to either with 68% saying they want immigration and border control.

Nevertheless, due to the election Wood does see a higher chance of a transition deal being struck which will keep some aspect of free trade going.

“In short, the downside risk of a chaotic very hard Brexit has eased, in our view, with the announcement of a general election but we think the UK is still heading for a hard Brexit. Our base case assumption explains why we have below consensus growth forecasts,” says Wood.

One aspect not widely considered is the impact of a May victory on other policies.

It is expected that she will jettison previous election pledges to keep taxes unchanged and allow the imposition of the discarded increase in national insurance for the self-employed. There may be more fiscal spending, which would be positive for sterling as it would take the pressure off the Bank of England to keep rates down. Baml’s Wood also warns against complacency even if polls are suggesting a Tory landslide, as many actual Tory MP’s are afraid of

Baml’s Wood also warns against complacency even if polls are suggesting a Tory landslide, as many actual Tory MP’s are afraid of losing their seats in pro-Remain constituencies, despite the promising polls so far.

In short, there is pressure for May to secure a large majority both from her executive and from financial markets and if she does not get the 75+ which Baml thinks she needs to ignore the noisy splinter groups within her party the Pound may quickly fall back down to pre-election announcement Tuesday’s levels.

 

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