TSP

London - Oct. 2019: Pro- and anti-Brexit flags outside Parliament, London. The UK market represents about 16% of the I Fund and the rest of Europe represents about 50% of the I Fund, so in total two-thirds of the I Fund is directly involved in Brexit uncertainty.

Lyn Alden

Brexit uncertainty continues to have a big impact on the I Fund. Until a couple days ago, the plan was that the United Kingdom would leave the European Union on October 31st, after a previous extension, satisfying the 2016 general referendum vote by UK citizens to leave. After three years of negotiations and extensions, this might have finally put an end to it.

However, due to continued inability to reach a final deal in time, the date of Brexit has been delayed once again, this time until January 31st, 2020.

The UK’s new prime minister, Boris Johnson, was adamant about leaving the European Union by the October 31st deadline, whether or not they have a deal in place, and he attempted a number of controversial measures to block UK’s Parliament from interfering. In addition, his cabinet managed to come to an agreement with the European Union regarding a customs border in Ireland, which has been the single biggest complication for Brexit.

However, the Supreme Court of the United Kingdom ended Johnson’s blockade of UK’s Parliament, and Parliament promptly shut down Johnson’s attempt to bypass them and rush towards Brexit by the deadline. Parliament still has not agreed to the tentative deal struck by Johnson’s administration and the European Union.

Now, it appears likely that the United Kingdom will hold a general election in December, which will confirm one way or another what mandate politicians currently have from the public. After that, there will presumably be another month of negotiations and Parliament decisions, and we’ll see if January 31st is indeed the date of Brexit or if there is another extension.

The UK market represents about 16% of the I Fund and the rest of Europe represents about 50% of the I Fund, so in total two-thirds of the I Fund is directly involved in Brexit uncertainty. This affects business investment confidence and currency strength, among numerous other variables.

U.S. Stocks: Watch the Federal Reserve

This week, the S&P 500 which the C Fund tracks has pushed to new all-time highs for the first time since July, despite the fact that S&P 500 earnings are down by 3.7% this quarter so far, according to FactSet:

Chart Source: CNBC

The Dow Jones U.S. Completion Total Stock Market Index which the S Fund tracks is still about 5% below its 2018 peak:

Chart Source: CNBC

On Wednesday, the Federal Reserve will announce updates to monetary policy, and the market currently expects the Fed to announce further interest rate cuts during this meeting. This could be a make or break moment for U.S. equities to continue to push to new highs or to fall again, depending on how stimulatory the Fed’s actions are perceived to be by investors.

Earlier this month, I discussed the Fed’s major shift in monetary policy, and Wednesday should provide more detail on current Fed plans for interest rates and treasury purchases, which have big impacts on equities, bonds, and dollar strength compared to other currencies.

See also, Trade War De-Escalation and a Major Shift in U.S. Monetary Policy