The market reaction to the Supreme Court judgement that the prorogation of Parliament is unlawful may have been fairly muted but this might be missing the long-term significance of the upheaval currently playing out in the UK political system.
On Tuesday, the Supreme Court ruled that Boris Johnson's decision to suspend Parliament for five weeks at the height of the Brexit crisis earlier this month was unlawful. The ruling was unanimous from the 11 justices on the UK’s highest court.
Supreme Court president Lady Hale said: “The decision to advise Her Majesty to prorogue Parliament was unlawful because it had the effect of frustrating or preventing the ability of Parliament to carry out its constitutional functions without reasonable justification.”
Sterling rallied in the hours after the judgement, leading to a slight fall in the FTSE 100. This is because many of the index’s members earn their revenues outside of home shores and therefore their share prices have an inverse relationship with movements in the pound.
Sterling vs US dollar after Supreme Court judgement
Source: Google Finance
All in all, however, the market reaction to the news was fairly subdued as the outcome of the court case is unlikely to have a material impact on Brexit risks or the country’s fundamentals. However, this should not necessarily be seen as a sign that risks are receding.
Elliot Hentov, head of policy research at State Street Global Advisors, said: “By any standard, this is an historic event, though the full significance may not be understood for years to come. The immediate market reaction is muted as none of the current fundamentals or Brexit risks have materially changed.
“However, that is a superficial view as Brexit is no longer the single risk facing the UK. Instead, the country is now exhibiting broad political risks more commonly associated in emerging markets. The erosion of the rule of law at the highest levels of government, as evidenced in today’s court ruling, is mirrored by a radicalisation of policy positions across the political spectrum.
“All the major parties are now advocating for deeply disruptive reforms, with the upcoming election amplifying extreme levels of policy uncertainty on Brexit as well as domestic policy settings. The polarisation around Brexit has now infected the broader political system, undermining one of the UK’s major sources of competitiveness - a stable political system and a predictable policy environment.”
Tim Graf, head of EMEA macro strategy at State Street Global Markets, added that the Supreme Court’s decision was “far more important” for the rule and process of law than it is for markets, but argued that the fact the court’s decisions were unanimous and the government lost on every front of its appeal was of “historic significance”.
That said, Graf said those hoping for some near-term clarity on the UK’s governance, politics, economy and markets are likely to be disappointed as their outlooks remain “as unclear as ever”.
“Whilst today’s decisions likely lower the probability of a ‘no-deal’ Brexit in the very short-term, they do not eliminate it entirely. Nor do they bring any of the interested parties closer to an agreement on the future relationship between the UK and EU,” he said.
“Questions of confidence in the government, as well as the means and timing of any next general election are likely to feature as the next episodes to watch in this long-running saga of the state.”
Potential Brexit outcomes
Source: John Worth, College of Europe, Bruges
Trevor Greetham, head of multi-asset at Royal London Asset Management, shared the above flow diagram, which was created by John Worth at the College of Europe, Bruges before the Supreme Court’s ruling.
“It’s unclear what happens next and this remains a fast-moving situation. Those mapping out the options soon run out of paper and are forced to make constant updates and adjustments,” he said.
Against the current backdrop, the multi asset manager expects the volatility of sterling to remain at a heightened level for the foreseeable future. This means there is a tilt towards currency exposure in his funds, though less so than earlier in the summer given the reduced risk of a no deal Brexit.
On what might happen next, Greetham said: “The government could yet gain parliamentary approval for a Withdrawal Agreement in time to leave with a deal on 31 October or they could try to leave without a deal on 31 October.
“They could ask for an extension to hold a general election or confirmatory referendum, or this could be done by a cross-party ‘government of nation unity’ after a vote of no confidence.
“It would be very hard to predict the outcome of a referendum or general election fought as a proxy second referendum with ‘no deal’ and ‘no Brexit’ options among the manifestos on offer.”