Market Update – June 27, 2016
Much, if not all, of the business news the last few days has focused on the fallout from the “Brexit” vote of Thursday night.
As is common when an international event catches the average investor by surprise, the second most commonly conducted exercise is research or investigation – the first tends to be selling.
And this weekend, there were no shortages of offerings on the upshot of the UK secession.
I wanted to include 2 for your review. Both are short and pointed.
One is cut and pasted below from Bloomberg and it is entitled: “Can Brexit Be Overturned? What Brits Are Asking Each Other Today.”
This article is more of a procedural guidebook on the process of Britain being extricated from the European Union than it is an opinion piece.
The second you can read by clicking here: After the Brexit Vote – What Lies Ahead for Markets. It is a strategy note written by Jeff Kleintop from Charles Schwab. In it, Jeff draws comparisons to prior periods of market angst, notably these 3: the Japanese tsunami and earthquake of 2011, the 2011 US Debt Ceiling deliberations and subsequent US debt downgrade and the European debt crisis of 2012.
While I think that all are relevant to the Brexit vote, the one that seems to track most closely is the 2011 US Debt Ceiling Debate and subsequent debt downgrade.
Both it and the Brexit vote are “organic” issues – homegrown varieties of consternation stemming from ecomonic discontentness and toxic relations within political leadershipship roles.
In the days and weeks immediately following the debt downgrade, the dire predictions of America’s future were too heavy for financial markets to bear and their performance suffered considerably. Not until investors acknowledged that economic resilience tends to persevere even in times of political turmoil, did the optimistic discounting of that resilience put a bottom in the market.
While there is no way to know the specific point at which such a realization will be reflected, it is always heartening to be reminded that it eventually will. There will be both catharsis and challenges from Brexit but ultimately we feel that firm ground will be found.
We’ll keep in touch throughout the week. dc
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Can Brexit Be Overturned? What Brits Are Asking Each Other Today
2016-06-25 15:28:33.689 GMT
By John Fraher and Thomas Penny
(Bloomberg) — Britain is coming to terms with its decision to leave the European Union after Thursday’s dramatic referendum. Here are some of the questions that are doing the rounds in the U.K. this weekend:
Can the referendum result somehow be overturned?
Possible, but unlikely. It’s true that the referendum is non-binding and the U.K.’s next prime minister is under no legal compulsion to act on the result. And a new premier could, in theory, go back to the EU and ask to negotiate a new deal beforetaking it back for a second vote. But this option has been ruled out by the EU’s other leaders. Most importantly, it would be extremely difficult to ignore the views of the 17.4 million people who voted to leave.
What about this petition calling for a second referendum?
A record 1.6 million people have signed a petition on Parliament’s website calling for a second vote. However, there is no mechanism in the U.K. for the public to trigger a referendum — the most that a petition can achieve is a debate among lawmakers. There are a few other problems. The petition demands the government annul the plebiscite if either side wins by less by 60 percent or if turnout is less than 75 percent. But the referendum has already taken place. And all the country’s leading politicians have pledged to recognize the result. So this probably won’t go very far.
Could the EU make the U.K. an offer that prompts a rethink?
Unlikely. So far all the indications are that Berlin, Paris and Brussels want a quick separation. “It’s not an amicable divorce, but it never really was a close love affair anyway,” said EU Commission President Jean-Claude Juncker.
When will the U.K. formally leave the EU?
Not for some time. Firstly, the U.K. needs to trigger Article 50 of the Lisbon Treaty, putting in place a two-year timeline for formal talks. However, Prime Minister David Cameron has said that’s a task for his successor, who won’t be in place for perhaps three months. And Boris Johnson, the favorite to take over, indicated Friday that there is no rush to formally start negotiations. So it seems unlikely that the U.K. will leave before late 2018 at the earliest.
Can the EU force the U.K. to trigger Article 50?
No. Only the U.K. can do that. That leaves a certain amount of negotiating power with Britain for now. Once the mechanism is triggered, though, the advantage switches back to the other 27 countries. So the timing of Article 50 is quite crucial.
How does the Tory leadership battle work?
Cameron said he wants his successor to be in place by early October. Assuming Conservative Party grandees decide to use the same system followed for Cameron’s election in 2005, 330 lawmakers will screen the field of candidates and whittle them down to two by July 21, when the House of Commons goes into recess for the summer. Party members will then choose the winner.
Who are the favorites?
Johnson is in front of the pack, according to bookmaker William Hill Plc, with odds of 8/11, giving him a 58 percent chance of winning. Theresa May, who wanted to stay in the EU, is next at 5/2, give her a probability of 29 percent, while Michael Gove, a leading Brexit campaigner, is at 10/1, giving him a 9 percent chance.
So is it a done deal for Johnson?
Not necessarily, says Alan Duncan, a Conservative lawmaker. While Johnson is charismatic and probably the most recognized politician in Britain, he is also erratic. That may not appeal to Conservative Party members traumatized by a bitter referendum campaign. “A lot of them don’t necessarily want a permanent ride on the Big Dipper,” Duncan told BBC Radio on Saturday.
Will there be a snap election?
Jonathan Powell, Tony Blair’s former chief of staff, says any new prime minister will need a mandate from the electorate before exit talks begin. “What sort of new relationship are we going to have with the EU?” Powell said in an interview with the BBC Friday. “Are we going to be Norway? Are we going to be Canada? who are we going to be?” Still, dissolving Parliament is not as easy as it used to be.
Since 2010, the U.K. has had fixed-term legislatures, and the next vote isn’t due until May 2020. But there are two circumstances in which there could be an early election. Firstly, if two-thirds of the House of Commons votes for one; and secondly, if a government loses a no-confidence vote and a new administration fails to win a confidence motion within 14 days.
Either of these could be engineered: The Conservatives have a majority, so can prevent any other administration forming, and it might be difficult for the main opposition Labour Party to argue against an election.
–With assistance from Robert Hutton.
To contact the reporters on this story:
John Fraher in London at jfraher@bloomberg.net;
Important Disclosures:
The views expressed herein are those of Douglas Ciocca on June 27, 2016 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This information is provided as a service to clients and friends of Kavar Capital Partners, LLC solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as, investment, legal or tax advice. Past performance does not ensure future results. Kavar Capital Partners, LLC makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that Kavar Capital Partners, LLC considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and we are not obligated to update any information or opinions contained herein. Articles may not necessarily reflect the investment position or the strategies of our firm.