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NEWS ANALYSIS

UK currency, stocks hope for the best in May's crushing defeat

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Even after news of UK PM Theresa May's Brexit deal defeat, the pound rose slightly and the stock market's move was seen as minimal.

London

WITH unpredictability the only certainty, Britain's currency, stock and bond markets appear to be hoping for the best, in their sanguine immediate reaction to Prime Minister Theresa May's crushing Brexit deal defeat.

The pound rose slightly and the stock market's move was minimal after the MPs rejected the EU withdrawal agreement by 432 votes to 202, the worst ever defeat for a UK government. Market participants hope that Parliament will decide on a "soft Brexit", that is, to remain in the customs union and not crash out with no deal.

But those outcomes are by no means certain, indicating that UK fund managers and other investors are in denial. The UK's indebted economy is already sliding and key trading partners Germany, France and Italy are also experiencing downturns.

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In an interview with BBC's Radio 4, Steve Eisman, a hedge fund manager of Neuberger Berman Group said that he had sold short three UK banks. Mr Eisman, who predicted the collapse of subprime mortgages before the 2008 financial crisis and was featured in the film, The Big Short, said that he was in Britain for a week. He has found that "no one has a clue on what is going to happen" now that MPs have overwhelmingly rejected Mrs May's deal.

As at the time of publication, the debate continues over hard-left Labour Leader Jeremy Corbyn's motion of no confidence in the government. The overwhelming prediction is that Mr Corbyn will lose.

But the Parliamentary opposition that includes the Liberal Democrats and Scottish Nationalists intend to continue snapping at the heels of the weakened premier and her government. Their aim is an election in the coming 12 months. Mr Eisman contends that if Mr Corbyn eventually wins, it would be extremely bearish for the UK and he has a list of 30 potential bearish UK stock bets.

In the meantime, Parliamentary divisions on what to do about Brexit, have to be resolved. European Union (EU) leaders who were hoping against hope that at the worst Mrs May's loss in Parliament would be small, are not prepared to hold a special meeting for the beleaguered UK premier. EU President Donald Tusk and Michel Barnier, EU negotiator have stated that the UK Parliament must decide what it wants. The 27 EU government leaders will then make a decision on proposals.

Mairead McGuinness, the Irish Vice-President of the European Parliament, summed up the Brexit problem: Yes, it was an astonishing defeat for Theresa May's compromise withdrawal agreement, but the various blocs of MPs who voted against the deal desired something different. The Tory Brexitiers are prepared to leave with no deal as they want a "clean Brexit" that follows World Trade Organization rules so that the UK can make its own deals with the US, Asia and elsewhere.

The remaining MPs - Labour, Tories, Liberal Democrats and Scottish Nationalists - want another referendum so that the people can decide on what they now know. Under such a scenario the March Brexit date would have to be extended.

The Corbynites who mainly want an election, also state that they want the UK to be in the customs union and in a single market.

They claim that if they negotiated, they would demand that Britain has a say on trade. EU leaders and negotiators have alresady scoffed and rejected those type of proposals. They have insisted reasonably, that a nation outside of the EU can have no say in EU trade policy.

Assuming that the government wins the no confidence motion, what next? Mrs May stated after her defeat that she wishes to first consult Northern Ireland's Democratic Unionist Party (DUP) on how to resolve the so-called "backstop clause" that would keep the border with Ireland open.

This clause in her withdrawal agreement has been the biggest stumbling block. The EU has promised that the backstop, which requires the UK to remain in the customs union, will be temporary. But the DUP and Brexitiers want a legal guarantee. The Prime Minister has also promised to discuss potential deals with opposition party members. But so far there have been no overtures to party leaders.

Meanwhile, a cross party group of Conservative, moderate Labour and Liberal Democrat MPs are discussing ways of proposing a Norway EU-type, European Economic Area and European Free Trade Association (EFTA)-type accord.

This would require the UK to remain in the single market adhering to the four freedom of movements, notably capital, goods, services and labour. Over and above that, the UK would remain in the customs union and that would keep the Irish border open. Such a deal would potentially boost sterling and satisfy businesses. The free movement of people, however, could be a stumbling block as Brexit voters in the 2016 referendum feared migration.

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