Brexit, Brexit, and more Brexit. UK readers will probably be desperate to stop talking about bloody Brexit. Well, the end-game appears to be in motion. Theresa May put her withdrawal deal to a vote in UK Parliament, and it was overwhelmingly rejected by lawmakers.
What a resounding defeat for UK Prime Minister Theresa May – again. Losing by 149 votes, May’s second attempt to pass her deal has gone up in flames. The future is now even more uncertain, with betting odds pricing in a high chance of a delay. The EU would have to play ball though, and there are elections coming up. Where the heck do we go from here – and what does it mean for the US stock market?
UK Crashing Out of the EU Will Have an Impact on US Indices
Today’s drop in the pound is worth noting as it probably is what helped the FTSE 100 close up on the day. Outside the UK, there are significant global ramifications here for us to consider. The UK is not a tin-pot economy.
While not the “Great Britain” it once was, when the pound was the world’s currency, this is still the 5th largest economy in the world. Add this to the fact that the Eurozone is the 2nd largest economic area in the world after the US and that London is the financial services capital of the world (or it was) and the effect on stocks could be considerable.
It is not like things were going particularly well for the EU anyway. Growth is limping along, and by all accounts, it looks like the ECB missed the boat to raise interest rates. German data, which has kept Europe afloat, has notably turned lower. The UK is a big export market for Germany and is generally integral to the whole zone. With no blockbuster trade deals so far secured by the Conservative government (Trump is playing hardball for US farmers), the resilience of global stocks might be waning.
Federal Reserve, European Central Bank, and Bank of England all Vitally Connected
Global Central Banks are vitally linked, particularly in the G10 space, and there is a definite hierarchy. We start with the Federal Reserve at the top of the pile and then it’s probably the ECB and maybe China. The Bank of England’s influence is a little below Europe’s. What Brexit does is have a ripple effect through monetary policy to the Fed. If Europe slows rates, then the US will slow down to maintain balance.
Because the Bank of England can’t raise rates, Mario Draghi at the ECB will want to slow his path to keep the euro competitive. Chairman Jerome Powell at the US Fed will see Draghi unable to move and therefore feel pressure to take his foot off the gas. If the Fed is too hawkish, then the dollar would attract too much capital, and this would stifle inflation in the US alongside investment.
Stock Market’s Biggest Worry May be Corbyn – Not Brexit
If the UK doesn’t crash out of the EU and instead there is a second referendum, this might warrant a surge of interest back into the British stock market.
Naturally, this would lift US equities. One of the most significant problems lurking for the FTSE 100 could be longer term, however, as the real likelihood of the UK’s left-wing leader Jeremy Corbyn coming into power could occur. The world’s 5th largest economy shifting to a more-protectionist leftist stance could be another big problem for free trade – especially with the threat of US President Donald Trump opening up an assault on European auto-manufacturers also lingering.
Peter Earle, economist and research fellow at the American Institute for Economic Research, told NBC that it would be foolish for US investors to ignore the dangers of Brexit:
“As we get closer to [Brexit date] March 29, the amount of uncertainty is going to increase. That’s going to affect the markets, investors and different entities in other markets jump into government bonds for safety.”
Beyond the impact on US stocks, access to trade in Europe is also a big question mark moving forward.
“Many American businesses use the U.K. as their doorway to the E.U. With a hard Brexit, that’s going to cause a lot of complications for U.S. businesses.”
If Pound Falls, US Dollar Can Get Stronger
As the Dow Jones, S&P 500 and Nasdaq have attracted billions in foreign capital, Brexit could conceivably be a boost for these indices. While overall markets could soften, European investors could rush to the US for safety. The resilience of the British pound over the last few weeks has suggested there is some optimism that a hard-Brexit is avoidable.
Certainly, the US dollar has seen a boost as capital has flowed into the greenback. In fact, concerns elsewhere in the world have created a perfect storm for the USD, as it has provided both better yield and better haven qualities than almost any other currency. This best of both worlds situation is precisely why Donald Trump has been complaining to the Fed about a strong dollar so much.
Could Brexit Chaos See Trump Extend Olive Branch to UK?
If the UK crashes out of the EU without a deal, then there is no question that the impact would be negative initially for global equities.
However, if there was an impact on the US stock market, in particular, it seems possible that Donald Trump might extend an olive branch. You see, Mr. Trump uses the stock market as an indicator of how he’s doing as president. If Wall Street was to drop dramatically because of Brexit, it seems likely he would soften his stance and sign a blockbuster trade deal with the UK. This is no guarantee, but it’s not a stretch to envision such an eventuality.
Theresa May was found in contempt of UK parliament for her handling of Brexit intel a while back. Parliament then demanded that she provide a plan B after her deal was rejected. Now Plan C has been written off for being the same as Plan B.
And people complain that the US has a chaotic political landscape.
Disclaimer: The views expressed in the article are solely those of the author and do not represent those of, nor should they be attributed to, CCN.