UK Impact

U.K. snap election ‘virtually rules out’ staying in EU’s single market, says Morgan Stanley

June vote also reduces ‘risk of a disorderly Brexit’

AFP/Getty Images                   Brexit business: British Prime Minister Theresa May met with European Council President Donald Tusk in April.




The U.K.’s upcoming snap election whisks away the chance for the country to remain in the European Union’s single market, according to Morgan Stanley.

The likely outcome of a stronger parliamentary majority for the current government would deliver that, plus reduce the risk of a messy Brexit, the bank’s analysts said — and that means sterling remains an attractive buy, strategists at the bank said.

A win for Conservatives “virtually rules out staying in the single market,” Morgan Stanley’s U.K. economics and strategy team said in a research note Wednesday.

U.K. lawmakers have backed Prime Minister Theresa May’s call for a general election to be held June 8, bringing it foward from its scheduled year of 2020. Polls suggest the governing Conservative Party stands to significantly expand its 17-seat majority in the House of Commons, giving May a stronger hand in pushing ahead with her strategy in Brexit negotiations with EU officials.

Read: Why U.K. Prime Minister May wants a snap election

May has supported a “hard Brexit” scenario that sees the U.K. leaving the EU’s single market — which eases cross-border trade — in return for regaining full control of its borders. The Morgan Stanley analysts say they expect the “sovereignty” red lines on U.K. control over borders, courts and laws to be put into the Conservative manifesto for the election.

Why U.K. PM Theresa May called an election

U.K. Prime Minister Theresa May has called a snap election for June 8. WSJ U.K. and Brexit Editor Stephen Fidler looks at some of the reasons why May has chosen to do so.

“A Conservative government would then imply leaving the single market: either a WTO-like outcome where the U.K. re-establishes national control but at the cost of economic barriers with the EU, or a ‘clean Brexit’ [Free Trade Agreement] outcome where the U.K. reestablishes national control while avoiding major barriers to business with the EU,” they wrote.

For the U.K.’s financial services industry, leaving the single market would mean losing key passporting rights that allow banks, fund managers and insurers to seamlessly sell their services across the EU.

Read: ‘Hard Brexit’ could cost London 75,000 jobs, think tank warns

Pound view

More Conservative lawmakers would also reduce the risk of a so-called disorderly Brexit, the strategists said.

“In the base case, the U.K. government would have the parliamentary majority to push through difficult decisions to seal a deal,” they said.

The next parliament should be able to wrap up Brexit negotiations before the June 2022 general election, they added.

The pound GBPUSD, +0.3052%  surged above $1.28 from around $1.25 after May’s snap-election call on Tuesday, and still held above $1.28 on Thursday after the House of Commons backed May’s move.

Buying the pound remains attractive, particularly against the euro, as the pound has broken through certain technical levels and uncertainty has been reduced over whether a final Brexit bill could pass the House of Commons, Morgan Stanley said.

Against the euro, sterling GBPEUR, +0.2012% rose above €1.19.

Sterling against the greenback traded around $1.50 on the day of the Brexit vote in June last year.

Strategists at Deutsche Bank said Tuesday they were closing out their bearish pound trades. Tuesday’s “announcement from PM May of a snap general election on the 8th June is in our view a game-changer for both the U.K.’s Brexit negotiations and sterling,” they wrote.

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