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Remember how freaked out we all were nine months ago, after the Equifax data breach? Human nature is a tough enemy, when it comes to your personal data security and privacy. When a news event flares up, we pay attention and then as the issue recedes, we can get a bit complacent. That’s why June, aka National Internet Safety Month, and the recently enacted European Union General Data Protection Regulation (“GDPR”) make now a perfect time for a refresher on cyber security and privacy.
At 12:01am Friday morning, the U.S. imposed previously announced tariffs on the European Union, Canada and Mexico. When the plan was unveiled back in March, the three regions were given a reprieve. The hope was that during a cooling off period, the U.S. would be able to convince the three to restrict metal shipments, as it had been able to do with South Korea, Brazil, Australia and Argentina.
Mexico, Canada and the European Union are vowing to retaliate against the U.S. for new tariffs on imported steel and aluminum. The Trump administration's 10 percent tariff on aluminum and 25 percent on steel took effect today. I joined "CBS This Morning" to discuss the impact on consumers.
Have a money question? Email me here.
It’s official: UK voters decided to leave the European Union. Brexit was a seismic and unexpected result, which caught global investors off guard (more on that later). The big question: What happens next? As noted in Brexit Q&A, the “Leave” win means that the UK government must decide when to invoke Article 50 of the Treaty of Lisbon, which outlines the legal process by which a state can withdraw from the EU. Prime Minister David Cameron announced that he would step down in October and suggested that the next Prime Minister should initiate the Article 50 process. Once it does, the withdrawal negotiations would begin. At a minimum, it would take two years, but that time frame could be extended by unanimous agreement among the remaining 27 member nations. During the process, the UK would obey EU treaties and laws, but not take part in any decision-making.
The biggest issue is how trade would be handled between the EU and the rest of the world. According to law firms Davis Polk and Sullivan and Cromwell, two powerhouses that advise multinational corporations, there are three basic options for the UK’s exit, based on existing models. Leaders of the Leave movement did not advocate a specific alternative during the campaign, so it is unclear which model they will follow.
Total exit: the UK leaves the EU and does not continue to benefit from any part of the single market. The UK either relies solely on the rules of the World Trade Organization (which include rules governing the imposition of tariffs on goods and services) as the basis for trading with the EU or negotiates a new bilateral trade deal with the EU.
The Norwegian model: the UK leaves the EU but joins the European Economic Area (EEA). The EEA is made up of 28 EU member states and three countries, which are not EU member states (Norway, Iceland and Liechtenstein), and extends the free movement of goods, services, capital and persons beyond the EU to those three countries. Under this arrangement, the UK would not benefit from or be bound by the EU’s external trade agreements. It would have to make significant financial contributions to the EU and continue to allow the free movement of persons, two of the Leave camp’s main criticisms of EU membership.
The Swiss model: the UK leaves the EU and does not join the EEA, but enters various bilateral agreements with the EU to obtain access to the internal market in specific sectors, rather than the market as a whole. Switzerland has negotiated a large number of sector-specific bilateral agreements with the EU and has access to some parts of the single market, but is excluded from the single market in some major sectors (for example, the financial services sector).
BREXIT impact on US companies: The choice of model will impact US companies that have a large presence in the UK. One sector in particular that is left hanging is financial services, because under the “Total Exit” or “Swiss” models, there would be no right for UK-authorized firms or individuals to provide financial services in the EU on a “passported” basis. This is critical because most US financial institutions currently use a UK-authorized person and/or entity to provide financial services elsewhere in the EU. Without passporting, the companies would need to obtain authorization from a EU member state by either establishing an authorized branch or subsidiary in that state.
Loss of passporting would create legal, compliance and infrastructure headaches, not to mention steep costs to US firms. Additionally, many US banks make London their hub across the pond because of the access to talent, support services and the use of English as the global language for financial services. So while many Wall Street operations and legal departments are scouting locations in Dublin and Frankfurt, they are hoping that they will not have to move the majority of their people and offices.
MARKET REACTION: At 1:00am Friday morning, when the referendum results were becoming clear, the first thing I did was to look up when US stock market circuit breakers are triggered. At that time, the British pound sterling tumbled to its lowest level since 1985, US stock futures were getting crushed and the mad dash to safe assets like US treasuries, German bunds and gold was under way. The news from trading desks across the globe was that unlike in 2008, there was no liquidity crisis and markets were functioning fairly well.
At the end of the trading day, the damage was not too bad, considering the magnitude of the news. US stock markets were down 3.5 to 4 percent, Treasury bond prices jumped and yields fell; and gold added 4.6 percent. The action in the UK and Europe was instructive: the UK FTSE 100 index fell 3.1 percent, boosted by export-driven companies that would benefit from a weak Pound. The larger FTSE 250 index fell 7.2 percent, its worst one-day drop percentage fall since Black Monday in 1987.
Meanwhile, European exchanges also slumped. The German DAX fell 6.8 percent and the French CAC-40 fell 8 percent. Investors are clearly worried about the impact of the BREXIT on the European economy and likely understand that a protracted and nasty divorce could push the EU into a recession.
CENTRAL BANK TOOLBOX: Over the past eight years, amid the financial crisis, worries about Greece and a generally sluggish economic recovery, global central banks have been able to soothe markets with interest rates cuts (sometimes going negative) and unconventional tools like bond buying (“Quantitative Easing”). This time around, though, the central bank toolbox may come under pressure. Global interest rates are already close to zero and bond buying may not do the trick if the BREXIT shock causes individuals and businesses to shut down and do nothing for a while.
That said; the next Federal Reserve occurs July 26-27 and if the cloud of EU uncertainty has prompted a further sell off in stocks, a rise in the US dollar and general mayhem around the globe, don’t be surprised if Janet Yellen and company reverse course and explicitly say that the central bank is not going to keep raising rates and would consider undoing last December’s hike and launching QE IV, if conditions worsen.
Frexit, Italeave, Czexit: Some economists and traders are concerned that because the world was not prepared for BREXIT, there could be a domino effect, whereby other nations will choose to leave the EU. Even a coordinated central bank intervention could not fight off the power that a fraying EU might create throughout the world.
And now, the weather: After talking to a number of traders, economists, bankers and analysts, it is clear to me that very few of them thought that BREXIT would occur; as a result, they are still in a bit of shock. While Friday was not terrible, the short, intermediate and long-term implications of BREXIT are simply unknowable. Like the weather in London, it looks we will be forced to live with lots of clouds, occasional storms and hopefully, a ray of sunshine.
MARKETS:
THE WEEK AHEAD:
Mon 6/27:
8:30 International Trade in Goods
10:30Dallas Fed Mfg Survey
Tues 6/28:
8:30 GDP
8:30 Corporate Profits
9:00 S&P Case-Shiller HPI
10:00 Consumer Confidence
Weds 6/29:
8:30 Personal Income and Spending
9:30 Janet Yellen on panel at ECB central banking conference in Portugal (Panelists: BofE Gov Mark Carney, ECB Pres Mario Draghi, Brazil Central Bank Gov Alexandre Tombini)
10:00 Pending Homes Index
Thursday 6/30:
9:45 Chicago PMI
Friday 7/1:
Motor Vehicle Sales
9:45 PMI Manufacturing Index
10:00 ISM Mfg Index
10:00 Construction Spending
What is Brexit? Borrowing from the mash up “Grexit,” which referred to the potential exit of Greece from the eurozone, “Brexit” is used to describe the referendum ("Should the United Kingdom remain a member of the European Union or leave the European Union?"), to be held on June 23rd. British, Irish and Commonwealth citizens who live in the UK, along with Britons who have lived abroad for less than 15 years, will determine whether to “leave” or “remain” in the EU. What is the European Union? In 1957, the Treaty of Rome created the European Economic Community (EEC), or "Common Market," which was the basis of what is now known as the European Union, or “EU”. The idea behind the EU was that countries that trade with one another become economically interdependent and more likely to avoid conflict, a pressing concern in the shadow of two world wars on the Continent.
There are 28 member-nations in the EU: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.
What is the Eurozone? The eurozone is a subset of the EU that shares a common currency, the euro. The Treaty of Rome, the Single European Act of 1986 and the 1992 Maastricht Treaty all paved the way for the Economic and Monetary Union (EMU) and a single currency -- the euro.
The currency was launched in 1999 for electronic transactions, and physical notes and coins were first issued in 2002. The 11 initial members of the EMU included: Austria, Belgium, Finland, France, Germany, Italy, Ireland, Luxembourg, Netherlands, Portugal, and Spain. Greece joined in 2001, followed by Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015. Today, the euro area numbers 19 EU Member States.
Do all EU countries use the Euro? No. Three of Europe's largest economies -- Norway, Sweden, and the United Kingdom -- do not use the euro. Great Britain maintains its own currency, the Pound Sterling.
What is the “Leave” Argument? Those who are in support of leaving say membership in the EU has led to high levels of immigration (one main tenant of EU membership is "free movement", which means you don't need to get a visa to go and live in another EU country); too many rules and regulations; and high costs. UK Treasury figures show that net contribution to the EU (including a negotiated rebate and money that is paid but sent) is £7.1 billion or $10.2 billion. The Leave argument is that not only would the UK save that money, but as Europe’s second-biggest economy, it could negotiate a better trade deal as a non-EU member.
What is the Remain Argument? Trading with other EU nations, as well as an influx of immigrants is good for the U.K. economy, according to the Remain camp. Additionally, there is a fear that if the U.K leaves the EU, international businesses will flee the UK, in search of a home in another EU nation.
What’s Expected? Recent opinion polls have shown a dead heat, but bookmakers’ odds still point to a victory for “Remain”.
When will we know the results? Polls close at 22:00 GMT (6:00ET) Thursday, 23 June and most believe that it will take about 6 hours to get a clear picture of who won, especially if the vote is as close as anticipated.
If “Leave” wins, how long will it take for Britain to leave the EU? Following a vote to leave, the UK government would have to decide when to invoke Article 50 of the Treaty of Lisbon, which outlines the legal process by which a state can withdraw from the EU. Once it does, the UK and the EU would begin to negotiate a withdrawal agreement, which at a minimum would be two years.
During the negotiation process, the UK would obey EU treaties and laws, but not take part in any decision-making, as it negotiated a withdrawal agreement. That period could be extended by unanimous agreement, which is why many analysts believe that it could take four or five years to tackle the myriad of issues, the biggest of which is how trade would be handled between the EU and the rest of the world. If the UK wanted to rejoin the EU, it could, but it would have to start the process from scratch.
If “Leave” wins, would other nations, like Greece, follow? Brexit could potentially be the first step towards the break-up of the EU, or the exit of one or more countries from the euro. Additionally, many believe that Scotland would launch a second effort to leave the U.K. – the first occurred about two years ago.
What are the market implications of Brexit? A vote to leave would negatively impact the British Pound, UK interest rates and stocks. According to the IMF, Brexit would likely plunge the UK into recession and could spark a stock market crash and a steep fall in house prices. It could also potentially create spillover effects in global markets, as uncertainty, the enemy of investors, would dominate. If Leave wins, economists expect UK GDP to shrink by 1.5 to 4.5 percent by 2021.
What are the political implications of Brexit? A Leave vote could see the departure of Prime Minister David Cameron, who started this risky process after he won the 2015 general election. Cameron was responding to pressure from his own Conservative MPs and the UK Independence Party (UKIP), both of which had heard from disgruntled constituents about the issue of EU control.
MARKETS: It was a “risk-off” week, as the combination of loose global central bank policies, worries over economic growth and fear over Brexit pushed investors into the sovereign bond markets. On Tuesday, the yield of the German 10-year bond fell below zero for the first time ever. The S&P 500 and NASDAQ had their largest weekly drops since late April.
THE WEEK AHEAD:
Mon 6/20:
Tues 6/21:
10:00 Janet Yellen’s semi-annual testimony before Senate Banking Committee
Weds 6/22:
10:00 Janet Yellen’s semi-annual testimony before House Financial Services
10:00 Existing Home Sales
Thursday 6/23:
UK BREXIT VOTE
10:00 New Home Sales
Friday 6/24:
8:30 Durable Goods Orders
10:00 Consumer Sentiment
