Brexit on the brink

●UK financial stocks and British pound dropped sharply Thursday

●Cabinet resignations throw Brexit deal, UK government into doubt

●FTSE 100 and British pound trading just above longer-term support levels


When Britain sneezes, the world catches a cold?

The days of the US market (or anywhere else) being an island are long gone, as evidenced by the drop in global equity markets—and US stock futures, which were in positive territory—around 3:30 a.m. ET Thursday. That’s when news of the resignation of British cabinet ministers and a call for a “no confidence” vote in Prime Minister Theresa May over the Brexit deal challenged the UK markets to uphold their country’s reputation for keeping a stiff upper lip in the face of adversity.1

Britain’s main stock index, the FTSE 100 (FTSE), turned lower but ultimately rebounded to close flat on the day. (One of the ironies of the Brexit ordeal is that while the British currency has suffered because of it, the falling pound has been perceived as a plus for the many British multinational companies in the FTSE, which hit new highs as recently as May.2) Nonetheless, the intraday move pushed the FTSE closer to its October 26 swing low, which itself represented a test of the index’s March correction low:

FTSE 100 (FTSE), 11/1/17–11/15/18. FTSE 100 (FTSE) price chart. Another test in the works?

Source: OptionsHouse (data)

So, the FTSE is trading a little above a big, fat support level (approximately 6,850-6,950) that could very well have a lot of sell-stops just below it.

But British financial stocks—which have been on the front lines of Brexit turmoil for months—were not as even-handed as the FTSE in their response to the day’s news. Barclay’s (BCS, chart below), Lloyd’s Banking (LYG), and Royal Bank of Scotland (RBS), for example, all dropped 5% or more, and retreated to or below their October swing lows:

Barclays (BCS), 4/27/15–11/15/18. Barclays (BCS) price chart. At October lows.

Source: OptionsHouse

And then there’s the British pound, which sold off more than 2%—its biggest one-day loss since 2017. December British pound futures (6BZ8) dropped to a nearly two-week low, halting just a little above the looming support level (around 1.2730) formed by the August and October lows:
December British pound futures (6BZ8), 4/10/18–11/15/18. December British pound futures (6BZ8) price chart. Dropped near support.

Source: OptionsHouse

There’s no reason the UK stock market and the British pound can’t bounce a third time off their respective support levels. But an absence of good news out of London in the near future could pull the rug out from under these markets as they dance around key levels.

Market Mover Update: Yesterday, January crude oil futures (CLF9) gained ground for a second-straight day, but as was the case on Tuesday, the market closed well off its intraday high.

Bitcoin followed up on Wednesday’s -12.3% breakdown below the longstanding support level around $6,000 with a 6% intraday drop yesterday, bringing the December futures contract (BTCZ8) to $5,155, its lowest level since the market began trading last December. The market pared its losses later in the day, though.

Today’s numbers: Industrial Production (9:15 a.m. ET).

Today’s earnings include: Helmerich & Payne (HP), Viacom (VIAB).


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1 The beginning of the endgame for Brexit. 11/15/18.

2 Bloomberg. Brexit’s Endgame Turns Endless, Sinking U.K. Domestic Stocks. 11/15/18.