The markets were already trading lower on Tuesday just before midday, but they soon took a decided leg lower in a session that ultimately drove the main stock indexes to their worst losses in about seven weeks.
Market participants have attributed that decisive drop in the Dow Jones Industrial Average DJIA, -3.10% , the S&P 500 index SPX, -3.24% and the Nasdaq Composite Index COMP, -3.80% to worries about the long-term prospects for a tariff resolution between China and the U.S. and the so-called inversion of a portion of the Treasury yield curve, spelling economic gloom in the U.S.
However, financial blogger Michael Kramer of Mott Capital has one intriguing — and perhaps not off-the-wall — theory pegged to developments in the U.K.’s planned exit from the European Union.
Kramer hypothesized in a Tuesday blog that reports that Prime Minister Theresa May was being required, by virtue of parliamentary vote that held her in contempt, to publish the legal advice she’d received about Brexit, played a key role in sending shivers through markets, adding to the already downbeat tone of the trading session. A separate development that same day also indicated that the U.K. parliament would regain control of Brexit talks if May were to lose a scheduled Dec. 11 vote on her negotiated plan to exit from the EU.
Here’s how Kramer put it, adding that the decline took hold at 12:04 p.m. Eastern time on Dec. 4: “But you know what happened around noon today? ‘Government to publish Brexit legal advice in full after MPs find it in contempt of UK Parliament,’ ” he wrote, citing a BBC report. “It would suggest that PM May may not have the support to get Brexit done. Once again Brexit haunts us. It was the spark that ignited the sell-off. Why … just watch …,” he added, pointing to the following chart:
Kramer pointed out that the inversion of a portion of the Treasury curve, where short-dated debt yields more than longer-dated counterparts, in a phenomenon that has preceded most past recessions, had occurred on Monday. He also said concerns about the murkiness of a putative Sino-U.S. trade truce had been persistent throughout Tuesday morning.
For Kramer, that leaves Brexit news as the most likely catalyst for the further downshift.
The idea may sound outlandish. However, it is worth noting that a so-called hard Brexit by the U.K., wherein no trade agreement can be achieved before its deadline to exit from the EU, could disrupt global markets and deliver at least a momentary shock to the financial system.
To be sure, there are a number of factors that influence markets, as previously mentioned, and it has often been hard to say what’s really steering the market at any given point. But Kramer’s theory highlights the fact that investors are struggling to get a grip on what’s behind the gyrations of this current market, and that is in contrast with the more halcyon trading days of 2017.
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