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Weekly Market Digest: What’s Happening with Brexit?

This week, US equity markets climbed higher from the last week, led largely by some of the most well-known technology companies, while other asset classes had a relatively uneventful week.

Some of the US’ largest Tech Companies were under fire this week for a variety of reasons, from Facebook’s privacy practices (and the FTC’s $5 billion settlement as a result) to the House Judiciary Committee’s anti-trust enquiry to Google, Amazon, Apple and Facebook.

Many of the aforementioned technology giants, specifically Amazon, Google, Facebook, and Twitter reported Q2 earnings this week, with all but Amazon announcing stronger than expected performance. Amazon missed earnings estimates as a result of infrastructure improvements intended to broaden the offer of free 1-day shipping to Prime members.

The House in the US passed a bipartisan deal raising the debt ceiling for the next two years, shortly before the upcoming 2020 elections. The Senate is expected to pass the measure sometime next week.

Puerto Rico’s governor stated that he would resign on August 2nd, 2019, after leaked messages from his office sparked protests in San Juan. Originally the governor had resisted protestor’s demands for him to step down.

Abroad, news surfaced this week of a secret agreement between China and Cambodia, allowing China the use of Ream Naval base in the Gulf of Thailand.

Weekly Returns:

S&P 500: 3025 (1.6%)
FTSE All-World ex-US(VEU): (-0.1%)
US 10 Year Treasury Yield: 2.08% (1.27%)
Gold: $1,418.01(-0.5%)
EUR/USD: 1.113 (-0.8%)

Major Events

  • Monday – The Wall Street Journal reported that median effective tax rates for S&P500 companies has dropped from roughly 25% in Q1 2017 to 20% in Q1 2019.
  • Monday – Equifax settled lawsuits stemming from its 2017 announcement of a widespread data breach, setting aside $425 million for consumers.
  • Tuesday – Former mayor of London Boris Johnson becomes the UK’s new prime minister. Promises to pull the UK out of the EU by the end of October.
  • Wednesday – House of Representatives approves $48.5 Billion in ‘forgivable loans’ for some of the nation’s most severely underfunded multiemployer pension funds.
  • Thursday – European Central Bank announced increased steps to buoy European economy, including a new cut to rates, and continued bond purchases.
  • Thursday – BMW, Ford, Honda, and Volkswagen announce plans to meet California’s emissions standards, as opposed to the more relaxed Federal standards under President Trump.
  • Friday – US Justice Department approves merger of T-Mobile and Sprint, paving the way for T-Mobile to become the 3rd largest mobile carrier in the United States. Part of the approval incents Dish Satellite, predominantly a TV provider, to become a 4th player in the cell phone provider space.

Our take: What’s Happening with Brexit?

About two years ago, our Weekly Market Digest addressed the question: what is Brexit? At the time, uncertainty and volatility abounded as investors questioned how Brexit would occur, and what the impact to the global economy would be.

This week, I feel that it’s a good time to talk about Brexit again as Boris Johnson, an outspoken proponent of a ‘no deal’ exit from the EU, became the UK’s newest Prime minister this week.

So, let’s start with a little refresher on Brexit. Brexit predominantly focuses on the UK leaving the European Union, which stemmed from a variety of post-World War 2 economic pacts designed to encourage greater cooperation and lower barriers to trade between a large swath of European countries. The EU has its own trade agreements, environmental standards and other agreements that impact member and non-member countries.

Fast forward to today – and investors still don’t have answers as to how Brexit will occur, if it in fact will occur, or what the global economic impact of any kind of exit will be. There’s a message here somewhere for not letting the news, even larger stories, impact investing decisions.

With prime minister Boris Johnson promising an exit by the end of October, we may get an answer soon to the question of how or if Brexit will occur. The economic impact of any exit, however, will take some time to truly be understood.

Brexit may end up being good for Britain in the long term, but it is hard not to view it as a bad thing for Europe in general. It increases the risk of further fragmentation of the union, which we don’t think global stock markets would be able to dismiss so easily. That said, the remaining countries in the EU appear to be avoiding granting the UK any further concessions. This is likely an act of preservation as the EU hopes to avoid further fragmentation from other member countries in the future. The result is a very uncertain outcome as both sides attempt to stand their ground.

As for stocks, Brexit is just one factor among many. We don’t think it should cause long-term investors to deviate from strategic asset allocations. Add Brexit to the continued back and forth between China and the US on trade, an international market impacted by said trade war, the Fed messaging that our domestic economy is less than pristine, and it would be unsurprising for investors to see continued volatility as we approach the October Brexit deadline. However, as always, investors should be ready for markets to surprise them.

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