Looking Ahead (20 May)

Tuesday, 21 May – May to present ‘new’ proposals to cabinet in last-ditch attempt to get her deal over the line

As had been likely for some time now, cross-party Brexit talks broke down on Friday morning.

May is expected to confirm her departure date following the next vote on her withdrawal agreement, to be held towards the end of the first week of June. At this point it seems likely that the Prime Minister’s deal will suffer another heavy defeat. Theresa May has reportedly gone cold on her original proposal to Corbyn and the Labour Party which stated that if an agreement proved elusive, then further indicative votes could be held, with the government then seeking to incorporate these changes into a vote on the withdrawal deal. She will instead focus on presenting a ‘new’ package of proposals at tomorrow’s cabinet meeting aimed at getting the Withdrawal Agreement Bill (WAB) over the line.

While we cannot completely rule out a last-minute deal, spurred by an event such as poor European Election results for both parties or by the indicative votes, we think it most likely that Theresa May’s tenure as Prime Minister will end without the WAB being passed. Future progress towards a Brexit deal will then depend on the outcome of the impending Conservative leadership election.

Thursday, 23 May – Sunday, 26 May – Domestic impacts of European Elections, rather than populist growth in parliament, arguably more significant for markets

The European elections are set to disrupt – although not completely undermine – the balance of power in the European Parliament. Polling suggests that parties on the far-left and particularly on the euro-sceptic far-right will gain seats. This is expected to come at the expense of the established groupings of the centre-right EPP and centre-left S&D.

From a market perspective, the effect of any changes at a European level are likely to be slow burning. It is the potential of the European Elections to catalyse change in particular Member States that should be of more concern to investors.

Particular attention should be paid to the UK, where the performance of the Brexit party will affect the Conservative leadership election; Spain, where the vote will sound the starting gun on government formation negotiations; Italy, where a strong performance by Matteo Salvini’s Lega would raise the possibility of a snap election; Greece, where the vote will show whether Alexis Tsipras’s budgetary giveaways are helping his party make headway in the polls; Austria, where the sudden collapse over the weekend of the governing coalition has thrown the country into preparations for a general election.

Thursday, 23 May – Publication of minutes of ECB April meeting

The minutes of the ECB’s most recent meeting will be closely assessed for any information they can provide on the future direction of policy beyond what was already divulged by the forward guidance and Mario Draghi’s press conference.

The most interesting information to come out of the April meeting was the admission by Draghi that the ECB would begin to consider the ‘mitigation of possible side effects’ of negative interest rates – a reference to interest rate tiering. While consideration of the idea is at an early stage the April minutes could still record discussion of tiering, which had already been hinted at in the records of the GC’s March meeting.