Market Insider

Markets could see heartbreak if Brexit is hard to do

Postcards showing the British Union flag, also known as Union Jack, sit on display at a souvenir store near to the Elizabeth Tower, also known as 'Big Ben', in London, U.K.
Luke MacGregor | Bloomberg | Getty Images

Wall Street traders will be watching a historic moment for the U.K. and Europe on Wednesday, but they're much more concerned about politics in the U.S.

Wednesday is the big day for Brexit, with British Prime Minister Theresa May triggering the official separation of the U.K. from the European Union.

For the most part, traders believe the markets have long been prepared for the start of the process, which comes with May triggering Article 50, the legal framework starting the negotiations that will unwind the decades-long relationship. But regardless, they will be watching the U.K. markets and the pound and euro closer than usual.

"They declare their divorce," said Art Cashin, director of floor operations at UBS. "It's something you want to be alert to."

Brexit could be anticlimactic but it will still get attention well into the U.S. trading day. "I'll be watching Brexit but I don't think it's going to have much effect. I think the negotiations will be going on for two years," said Andrew Brenner, global head of emerging market fixed income at National Alliance.

But Brenner and Cashin both said the market is watching the White House, and traders want to see more from Washington, after last week's failure to replace Obamacare.

"I think this was a turnaround Tuesday and we'll wait and see. The market wants it to look like [Washington] is getting something done. People are pushing for [Trump] to get off taxes and do infrastructure," said Cashin. He said an infrastructure spending plan could be a quick pop for the economy, and find bipartisan support.

Cashin said the concern is Congress and the White House will get bogged down in tax reform, and there may not be easy agreement. "It looks like everybody's got an opinion on taxes."

Brenner said he now thinks the Fed will have a hard time driving through two more rate hikes this year, due to uncertainty brought on by Washington.

"I think there's only going to be one rate hike," he said. "One, can they get the deficit approved so they don't have to shut down the government? And two, will they get a tax plan that will be meaningful? There's a lot of people that don't believe Trump can get it through. I'm not one of those people. If equities get sloppy, sell in May is not far away," he said, adding the Fed won't raise interest rates if there's a big stock market sell-off.

Stocks got a lift Tuesday from the strongest consumer confidence reading in 16 years, and also as investors jumped in to do some quarter-end buying. The was up 150 at 20,701, and the S&P was up 17 at 2,358.

Fed Vice Chairman Stanley Fischer told CNBC Tuesday afternoon that the Fed could raise interest rates two more times this year, and that he was weighing the failure of the last week's health care vote in his calculations. Those comments seem to dampen speculation that the Fed could get more aggressive than its current forecast of two more rate hikes this year.

Fischer's comments were a slight positive for the market. "I don't think he hurt," said Cashin. "He was just in the chorus helping out."

More Fed speakers are out Wednesday, with Chicago Fed President Charles Evans at 9:20 a.m. at a bank conference in Frankfurt. Boston Fed President Eric Rosengren speaks at the Boston Economic Club, and San Francisco Fed President John Williams speaks at the Forecasters Club of New York.

"Fed speakers are pretty much irrelevant right now," said Brenner. He said he is watching for signs of activity ahead of Japan's year-end Friday.

"Window dressing for our quarter end will probably happen more towards Thursday," Brenner said.

There are also pending home sales for February at 10 a.m. ET, and mortgage applications at 7 a.m.