There is an old Chinese saying that goes, “May you live in interesting times.” On Tuesday, December 4, times got very interesting in the U.S. stock market and the British pound.
The U.S. stock market took it on the chin on Tuesday. The DJIA fell by 799.36 points on the session and closed near the lows of the day. The S&P 500 dropped 90.31 points, and the NASDAQ shed 283.09 points down 3.80% putting in the worst percentage performance of three indices. Selling in stocks came in the environment of deafening silence from China. In the aftermath of the meeting between Presidents Trump and Xi, all of the optimism seemed to come from the U.S. while China has remained quiet over the trade issue and the prospects for a future agreement. Optimism turned to pessimism in the equities markets.
At the same time, all hell broke loose in the United Kingdom on Tuesday as the Parliament took the unprecedented step of holding the May government in contempt of Parliament.
As the weekly chart highlights, the pound versus dollar currency relationship fell to $1.2665 during the session which was a new low for 2018 and the lowest level since June 2017.
The British Parliament handed Prime Minister May more than one defeat on Tuesday. The contempt vote came as the Prime Minister refused to share legal opinions surrounding the Brexit plan with the members of the Parliament. On December 11 the body will vote on the Prime Minister’s plan for Brexit that has already received the approval of the European Union. On Tuesday, Parliament also voted that if they turn down the proposal, the members of the legislature will take increased control of the process.
The President of the European Council, which is the body that governs the European Union, handed the UK an ultimatum last week saying that the current proposal is the only one possible. If the Parliament votes in favor of the Prime Minister’s plan for Brexit, the divorce will proceed, and we will likely see a rally in the British pound from the lows of this year. However, if the vote in Parliament fails, watch out because all hell could break loose. After the contempt vote, failure of her plan could spell the end of the Prime Minister’s tenure in office as her resignation or a no-confidence vote would likely come next.
Tuesday was a busy day in the world of Brexit. The legal counsel for the EU said that it would be within EU law for the UK to walk away from Brexit and remain within the Union which rubbed salt in the wounds of proponents of the divorce in the UK. If the Parliament votes against the plan, the March 29, 2019 deadline is a line in the sand for Brexit.
If the deadline passes without a deal three million EU citizens living in the UK and one million British nationals living in EU member nations will lose all automatic rights and protections overnight. At the same time, air travel in the UK could immediately cease, and supermarkets could run out of food. The bottom line is that time is running out. The December 11 vote is not a line in the sand, and while it could unseat the Prime Minister, the March 29 deadline has the potential of causing a political catastrophe in the United Kingdom. However, a failure on December 11 will thrust fear and uncertainty in markets to a new and scary high.
We are living in “interesting times” in markets these days. The passage of the Brexit plan through the British Parliament will likely cause a rally in the pound against the dollar. However, a failure could send the pound to the post-Brexit low at $1.2001 or lower. The impact of a no vote in Parliament has the potential to cause volatility and contagion that could ripple around the globe like a tsunami.