LONDON (Reuters) - Brexit uncertainty will be elevated to whole new plane after last night's decision to grant the UK an Article 50 extension to October 31. While that is not as long as many in the European Union had sought, it is plenty enough time to stir up the domestic politics of Brexit even further.
The only thing we now know is that Britain will not leave the EU tomorrow; the rest is up in the air. The first question is whether the longer extension now removes leverage on Jeremy Corbyn's Labour to agree a cross-party deal: if it does - as many now assume is the case - it will be a torrid summer. Pro-Leave and pro-Remain groups will use May 23 European Parliament elections as a proxy war over Brexit.
If the ruling Conservative Party is routed for failing to lead the UK out of the EU, May will face huge party pressure to quit (note she has already suggested she would not be PM if Britain had not left the EU by June 30).
Hard Brexiters will try to take control of the Conservative Party and be ready to commit a no-deal Brexit if necessary. If, on the other hand, the large pro-EU campaigning networks that have emerged since the June 2016 Brexit vote can secure a clear victory in the European Parliament elections, that could also have game-changing clout.
The six-month reprieve may not be enough by itself to hold a snap general election or a second referendum, but if either were on the cards, the EU would probably grant a further extension.
It could be argued that the chances of the two extreme Brexit outcomes - a no-deal exit and no Brexit at all - are now on the up. Meanwhile, for business, investors and anyone else wanting to take decisions beyond a horizon of a few weeks, the uncertainty deepens.
MARKETS AT 0655 GMT
An extension of the Brexit deadline to Halloween has done little to disturb sterling from its recent slumber, with the pound shrugging off the widely expected agreement at a Wednesday night European Union summit — where the UK was given until October 31 to back an exit deal and could leave sooner if it could find some parliamentary compromise.
While the positives for sterling, as well as UK and European equities, include the removal of a near-term cliff edge, this is offset by a number of other risks, including UK PM Theresa May’s possible replacement or a general election and by the threat to the UK economy of a prolonged period in limbo.
As a result, there have been no conviction bets emerging in the pound and it remains stuck just below $1.31; it’s been largely hemmed in between $1.30 and $1.33 for almost two months. And with Brexit day now potentially kicked out to October, three-month implied volatility for sterling in the options market has fallen close to 8 percent – its lowest since last August.
Elsewhere on world markets, the recent ebullience in equities and risk assets has also fizzled amid worries about a global downturn, policy uncertainty, and persistent tariff threats from Washington. Wall Street eked out another gain overnight, but Asia markets were mostly in the red – Shanghai and Hong Kong lost about 1 percent and Tokyo and Seoul were flat.
MSCI’s all-country stock index ticked lower and its emerging-market component broke a 10-day winning streak – its longest run of gains in more than a year – and slipped 0.3 percent. Chinese inflation data showed consumer and producer price rising faster last month, but by less than expected. The U.S. CPI report yesterday was mixed as well: a surprisingly high headline offset by a softer core.
Minutes from the Federal Reserve’s latest policy meeting did not enliven the U.S. rates debate, and the combination of economic anxiety from Washington and from the European Central Bank yesterday did little to encourage investors.
ECB chief Draghi’s message was basically that the central bank was prepared to use all available tools to ensure inflation gets back up to target, although he gave little new detail on how it might offset the effect of a longer period of negative interest rates on euro zone banks.
Ten-year bund yields slipped back below zero and money markets moved to price a 20 percent chance of even another cut in policy rates this year. Incoming economic numbers did brighten some of the gloom, with French and Italian industrial numbers on Wednesday beating forecasts. In currencies, the euro was higher against a mostly flat dollar.
— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own —