Brexit talks are not progressing well. At the Salzburg summit Prime Minister May was rudely rebuffed for her demands of a more rapid response to the UK’s proposals for post-Brexit arrangements. The PM did not help herself by being “difficult” with the EU delegates attending the meeting. The risk is increasing that Brexit will undermine the UK and probably the US stock markets.
As it stands, it is quite possible that there will be no deal in place March deadline for Brexit occurs. Brexit looks like it will be a fiasco. What exactly will happen is unclear. Brussels is not exactly friendly towards London. And the UK government is in disarray. Some ministers are openly hostile towards the Prime Minister. Boris Johnson, the former foreign minister, quit the cabinet a few weeks ago and is letting his pro-Brexit views known widely.
Importantly, the latest round of internal squabbles is not a good sign as the fall party congress nears. It is quite possible that the current squabbles will turn into open warfare that will result in the ouster of the Prime Minister. It is unclear who will replace her. There is some speculation that Boris Johnson may be in the running. It may just be that his time has come for the leadership post. But that does not mean he will be more successful with Brexit than Theresa May has been.
It is also possible that this time around that Labor will take on the mantle of leadership, something Jeremy Corbin has been after for quite some time. He is basically an anti-Brexit person. It seems he wants a second referendum on the subject.
Ms. May in her address after the Salzburg meeting said that in no way will she allow a retreat from the Brexit referendum. She may mean that but practical considerations may force her to change her tune. Significantly, the British pound on Friday took a major dive against the dollar and the Euro. It fell to $1.3067 from just under $1.33 in just one day.
A new Brexit referendum could spell disaster for the UK’s stock market. That would not bode well for the US markets. After falling to a multi-year low in February 2016, when the UK announced that it would hold a vote to exit the European Union, the FTSE which is an index comprised of UK companies fell to its lowest level since 2016. When the vote passed in June of 2016, the FTSE fell again. However, the FTSE hit a new all-time high in early 2018 and has increased steadily and by 31% compared to its 2016 low.
Since the FTSE has enjoyed the prospect of a Brexit happening we believe that it will likely sell off if the Labor party gains control and calls for a new referendum. Based on the correlation of the relationship between the FTSE and the S&P 500 over the last 10 years a sell- off in the FTSE could potentially have a negative impact on the S&P 500. The FTSE is one of a few of the world’s stock indices which is within range of its all-time high.