foxex: Brexit Breakdown

The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's Headlines

1. The U.K. Parliament Soundly Rejects Brexit Deal

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Credits: John Keeble/Getty Images

Brexit Breakdown

The British Parliament soundly rejected Prime Minister Theresa May's Brexit plan today, delivering her a second massive defeat this year, plunging the future of the U.K. into deep uncertainty. With just 17 days to go before the UK is due to leave the European Union, U.K. lawmakers have some very difficult decisions to make that will shape the future of the country, the European Union and the global economy.

Read our full Brexit Overview here

Why it Matters

Citizens of the U.K. voted to leave the EU in a historic decision on June 23, 2016. Since then, the U.K. has been planning its departure from the European Union, and hundreds of businesses have been planning to leave the U.K., taking thousands of jobs and capital with them. Since Theresa May took over as Prime Minister in July of 2016, she has been on a non-stop mission to craft a deal that is acceptable to the European Union and U.K. Parliament. It has been impossible. She has been backed into the unenviable position of taking the country out of Europe with no deal, delaying the U.K.'s scheduled exit from the EU, or coming up with a new deal that will get the approval of the EU and Parliament - an impossible challenge after Parliament rejected the deal she worked for two years on was defeated for a second time today.

Meanwhile, the U.K. is faced with slowing growth that could be exacerbated by more uncertainty if Brexit is delayed. Here is a chart of U.K. GDP leading up to January of 2019, courtesy of tradingeconomics.com

What's Next

On Wednesday the U.K. parliament will vote on whether to allow a 'No Deal Brexit'. The Labour Party will vote against it. May will allow the Conservative Party a Free Vote - where the Conservative MPs can effectively vote their conscience. Given the opposition, it is likely that this will be defeated - effectively keeping the U.K. in Europe.

On Thursday, there will be another vote on whether to request an extension to Article 50.

Remember, Article 50 is the clause in the European Union's (EU) Lisbon Treaty that outlines the steps to be taken by a country seeking to leave the bloc voluntarily. May became the first leader to invoke Article 50 on March 29th, 2017, following the will of British voters. That set this whole two-year countdown into motion. The main issue is that if Parliament votes to delay Brexit for at least two months, their is currently no alternate plan that the Prime Minister can take to the European Union to request the extension.

As Theresa May put it to Parliament after today's defeat,

"Voting against leaving without a deal, and for an extension, does not solve the problems we face. The EU will want to know what use we want to make of that extension. The house will have to answer that question."

It Gets Worse for Boeing

Editor's note: It's always awkward to write stories about a company when it is involved in an accident or accidents where lives are lost and families are devastated. It feels insensitive because it is. We understand that. However, as business journalists, it is our responsibility to write about the companies we cover and the financial stories impacting them. We mean no offense and we extend our sympathies to all who are impacted by these tragedies.

What Happened

More safety concerns are emerging about Boeing's 737 Max Jet following the second deadly crash of its prized new airplane in five months.

According to the Associated Press the 737 Max is the newest version of the 737, the best-selling airliner ever. Since debuting in 2017, Boeing has delivered more than 350 of them in several versions that vary by size.

Boeing has taken more than 5,000 orders for the various Max versions, and they constitute the largest share of the company's backlog of nearly 5,900 planes. They carry list prices from $100 million to $135 million, although airlines routinely get deep discounts.

The following countries and airlines have grounded the 737 Max pending further investigations.

China
Brazil
Argentina
Indonesia
Ethiopia
Cayman Airways
Comair (South Africa)
Royal Air Maroc

The FAA in the United States has decided against grounding the airplane given that the investigation is in its early days and has not seen any data to take action.

We wrote yesterday about Boeing's outsized impact on the DJIA. James has more in our Chart of the Day on how the decline in Boeing's share price, which was on the rise in 2018, reacted today, and its impact on several widely held ETFs that hold the stock.

Who is this Man?

If you guessed Tim Berners-Lee, you are not only correct, but you are an astute student of modern history. Berners-Lee is widely credited with creating or helping to create the internet as we know it, or knew it, I should say. As the world wide web (www) celebrates its 30th birthday this week, Lee, who wrote "A Proposal for an information management system', in 1988, has issued a blistering commentary on what it has become.

Here are a couple choice lines, but we recommend you read it for yourself.

"I broadly see three sources of dysfunction affecting today's web:

1 - Deliberate, malicious intent, such as state-sponsored hacking and attacks, criminal behavior, and online harassment.
2 - System design that creates perverse incentives where user value is sacrificed, such as ad-based revenue models that commercially reward clickbait and the viral spread of misinformation.
3 - Unintended negative consequences of benevolent design, such as the outraged and polarized tone and quality of online discourse."

We recognize that we wouldn't be here without Berners-Lee, so we appreciate what he helped create, and we hope we are putting it to the right use.

Chart of the Day: Boeing's Decline Drags on ETFs

The rapidly intensifying crisis over Boeing's previously revered 737 Max 8 jet has reverberated across the globe in the past few days. Severe concerns surfaced after a second fatal Max 8 crash in less than six months occurred in Ethiopia over the weekend. Clearly, these tragedies have been absolutely devastating for all involved. In response, several airlines and even countries, including China, Indonesia, and Singapore, have grounded all 737 Max 8 aircraft.

The negative effect on Boeing's business has also been made abundantly clear. After reaching a record high of 446.01 only at the beginning of March, shares of Boeing (BA) gapped down sharply a little more than a week later as investors dumped the stock on Monday. Though some of those losses were pared by Monday's close, Tuesday saw a fresh bout of selling as the full implications of Boeing's disastrous crisis came into clearer view. By the market close on Tuesday, the stock had lost nearly 16% from its high on March 1st. As shown on the chart, this selling was accompanied by a massive spike in volume - several times higher than its typical levels of trading volume. In the process, the stock has dropped to approach its key 200-day moving average to the downside.

As we noted here yesterday, Boeing's sharp losses weighed more heavily than would be expected on the Dow Jones Industrial Average. This is due to the Dow's price-weighted calculation. Since Boeing is a relatively pricey stock, it accounts for more than its fair share of the index. When Boeing moves, the Dow tends to move with it. Similarly, several key ETFs have Boeing as their largest single holding. This includes the Dow-tracking ETF, DIA, of which Boeing currently accounts for more than 10%. The stock accounts for even more of the iShares U.S. Aerospace & Defense ETF (ITA) at more than 12%. Finally, even the Industrial Select Sector SPDR Fund (XLI) has Boeing as its top holding at more than 9%. As of Tuesday, all three of these ETFs have continued to be weighed down by Boeing's decline.