I agree with Berze. It sounds like the one boy was trying to mock the other boy by calling him a girl's name. He was introduced as Brendan, which is a boy's name, but he called him Brenda, which is a girl's name. "Brendan" didn't get angry at this attempted insult and said something which means "I know you just tried to insult me by using a girl's name, but why should that insult me? Is there something wrong with being a girl?". In English, when you notice a lot of people are acting strange or a little bit crazy you can say "I think there is something in the water". Which means "maybe there is some drugs or poisons in the water supply of this town and that's why everyone is acting so weird, they've all drunk this poison and I'm the only one who hasn't".

"Why is being a girl an insult?" He says by it: "How your calling me Brenda instead of Brendan an insult? Calling me feminine is not an insult." He accuses him of being agghressive-macho and questions his sense of humour as comeback for teasing him and Lisa about dating each other.

"... I think there's something in the water in this town." It means that the people in this town are really weird, crazy (water polluted by something that causes craziness, the weirdness of people living in the town); so she dumped him as she thought he was crazy like everyone else.

Nelson tries to tease/mock Brendon by calling him with the feminine version of his name, "Brenda". Brendon deactivates his attempt at mocking him by calling out Nelson's toxic masculinity, by saying that there's nothing insulting about being a woman.