foxex: Brexit Breakdown

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. Brexit Breakdown

2. Chart of the Day: U.K. Pound Plummets on Brexit Chaos

Markets Close

Dow
24,423.26 +0.14%

S&P
2,637.72 +0.18%

Nasdaq
7,020.52 +0.74%

VIX
22.64 -2.54%

INV Anxiety Index
100.32 Neutral

US 10-Yr Yield
2.856 +0.21%

Brexit Breakdown

U.S. markets continued their volatility dance today, swinging 3 percent or more intraday to finally end relatively flat. We were facing a 500 point decline on the DJIA in the early afternoon, but those losses evaporated for no particular reason as we neared the close. We are not going to make up a magical explanation for why these things happen except to say that a big investor or a bunch of big investors decided to buy stocks, and that turned the market around.

What's more important today? Brexit, and the chaos around it. The question is: will Brexit happen or not? The outcome will certainly impact global markets.

Here's the latest:

Theresa May, the British Prime Minister, announced today that she would delay an important Brexit vote in Parliament originally scheduled for Tuesday. There is speculation that not only would she have lost the vote, which is key to the big Brexit vote due in March, but that she might have suffered a vote of no confidence in Parliament if that vote failed, which would have forced her to resign.(They don't play around in the U.K.)

Brexit has always been a controversial topic in Europe since the British narrowly voted to leave the E.U. back in June 2016, but it has reached a fever pitch in the last several weeks as members of May's cabinet have resigned and she has lost key allies in the House of Commons. The value of the British pound is at its lowest levels in 19 months as the uncertainty swirls. James gets into the ripple effects of that in our chart of the day, below.

Why it Matters:

Markets hate uncertainty, and Brexit is all but certain. In May's press conference today she suggested that the longer the delays in ratifying the agreements around Brexit linger, the more likely a 'No Deal' will be the result come March. A 'No Deal', would be a disaster for Great Britain given how the entire of Europe has been preparing for Brexit for two and a half years. Companies have moved their headquarters out of London to places like Dublin and Frankfurt, transferring billions of dollars of technology and human capital along the way. New treaties and trade terms have been negotiated, and companies inside the U.K. have already pivoted their operations in anticipation of the U.K.'s break up with the EU. If Brexit negotiations result in a 'No Deal' this late in the game, it won't be without significantly inconveniencing those companies that have made adjustments (nor without major economic pains).

What's Next:

May's delay of Tuesday's vote may buy her a little more time to regain support from the MPs, but it's hard to see that happening now, as many of them shouted, "Resign! Resign! Resign!", at her as she announced the postponement today.

Bank of America Merrill Lynch's global economic team sees these as the possible scenarios that could unfold:

Deal: The UK could find a compromise that both European and UK politicians support.
No Deal: The UK could leave the European Union at the March deadline with no deal on the new rules of engagement with Europe. This would cause trade to grind to a halt and could eventually trigger a recession.
Remain (or no Brexit): After a painful political process, the UK could call for a new referendum and agree to stay in the Union.

All of this is to say there is no clear outcome here. The original Brexit vote split the U.K. in half back in 2016, and the path forward was never certain. The DJIA fell 900 points in the days after the initial Brexit vote in June. The FTSE fell more than 3 percent, but recovered after policymakers promised to backstop the markets if it got worse. It didn't, but that was then. Global markets are in a slump right now as growth is slowing around the world. The fog surrounding Brexit negotiations is bound to magnify those problems.

Other Headlines:

Why Cyclical Stocks May Outperform in 2019

Every sector has its day, and Growth is so 2018

The December Stock Rally may not Happen this Year

Past used to be prologue in the stock market... not anymore

Apple files to overturn iPhone Sales Ban in China (CNBC)

This is a huge deal for Apple, which is already facing slowing sales. The iPhone is not as popular in Asia, but it's not a market Apple can afford to lose

Madoff's Victim's are Close to Getting their Money Back (Bloomberg)

Great reporting by Bloomberg News, and terrific graphic visualization. It is also cool that there is some justice for the Madoff victims.

Chart of the Day: Sterling gets pounded after British PM delays Brexit vote

The British pound had already been teetering on the brink of a breakdown due to Brexit tensions, but Monday was the trigger that pounded sterling down to nearly a 20-month low. Not since April of 2017 has the pound dropped to such a low level against the U.S. dollar.

Driving the plunge was British Prime Minister Theresa May's confirmation on Monday that the U.K. government would delay a parliamentary vote on Brexit that had been scheduled for Tuesday. The Brexit vote is at the very center of U.K. politics right now, and any breakdown in negotiations has the potential to wreak havoc on May's government, the U.K. economy and its currency.

As the GBP/USD chart shows, the pound has been falling sharply against the dollar since April of this year. From that April high just short of the 1.4400 handle, GBP/USD has fallen to its current level under 1.2600, for a drop of over 12% (as of Monday afternoon).

Where does sterling go from here? With Brexit tensions unlikely to go away any time soon, the pound is likely to remain under pressure, especially against continuing U.S. dollar strength. If GBP/USD stays below the key 1.2700 former support level that it just broke to the downside on Monday, the next major bearish target could be as low as the 1.2000 handle.