Thursday, December 8, 2022

Britain Votes to Leave EU, Impacting Global Markets

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by Darin Newsom, DTN Senior Analyst


History was made Thursday night into Friday morning as the United Kingdom voted to leave the European Union. Leaving the discussion of politics and economics to those who follow these subjects more closely, I want to look at the immediate Butterfly Effect on global markets.

DTN Market Analyst Todd Hultman covered UK's Brexit vote late into Thursday night before handing the baton off to yours truly early Friday morning. I entered the fray about the time victory was called for those voting “Leave”, but global markets had already voiced their opinion. After an initial rally the British sterling fell to a 35-year low while the U.S. dollar index (USDX) rallied 3.174 (3.4{2fba0047518ad2e639da733ea78e24abf77cec06f485a26b152e17f2a77aa67a}) from Thursday's close. Reflecting a race to safe haven markets, gold gained $99.50. That's right, just four bits short of a $100 rally.

Global equity markets were in full panic selling mode with Japan's Nikkei losing about 1,300 points (8{2fba0047518ad2e639da733ea78e24abf77cec06f485a26b152e17f2a77aa67a}) ahead of what was expected to be a crushing open in European markets. As expected London's FTSE 100 fell about 500 points, Germany's DAX dropped more than 1,000 points, and Frances CAC-40 dipped 400 points. What was interesting though, within the first hour, was the FTSE 100 started to rebound. Was it a case of nothing more than a dead-cat bounce, or as chatter started to pick up on, was the Brexit vote more troublesome for the rest of Europe more than the U.K.?

With the exception of gold, the commodity sector in general was hit by heavy investment fund selling due to the explosive rally in the USDX. Crude oil initially dropped $3.40, or about 7{2fba0047518ad2e639da733ea78e24abf77cec06f485a26b152e17f2a77aa67a} of its price, in a short period of time while grains continued to be pummeled. July corn fell as much as 10 1/2 cents while July soybeans moved 20 1/2 cents lower. Even Chicago wheat, where noncommercial traders already held a net-short futures position, fell 12 1/2 cents. As I joined the discussion on Twitter a friend of mine greeted me with, “Welcome to chaos.”

As most of you know, Chaos Theory is key part of my analysis. Some would say it provides an out when markets don't behave the way my price charts indicate they should. Others recognize it for what it is: The wildcard that creates unexpected change. Chaos, by its definition, is an unexpected event at a critical time leading to changed results. Chaos events are often called Black Swans, meaning an event that comes as a surprise and has a major effect on changing the way we view things.

With all that in mind, does the Brexit vote count as a Black Swan?

I don't think so, and here's why. First, the result didn't come as a complete surprise. Yes, polls as late as Thursday evening (London time) were still calling for a narrow “Stay” victory. But in reality, how often are polls wrong? Heading into the vote count results were simply too close to call.


The second criterion for a Black Swan event also seems to be lacking, at least for now. Once I got caught up on Todd's overnight blog posts (see DTN's Market Matters Blog) my attention quickly turned to long-term trends on monthly charts. Surely the wild, volatile moves seen across the board in global markets had created key turn signals. Or did they?

Staring with the three Kings of Commodities that I've discussed so often in this space, gold again was the lone bull. Yet the sharp overnight rally was absorbed into an orderly extension of its long-term uptrend that began at the end of January 2016 (recall the On the Market column, “Two and a Half Kings”). The market's monthly close chart (the cleanest look at any market) showed the more active August contract was testing technical resistance between $1,317.10 and $1,354.90. Crude oil also remained in a long-term uptrend with the spot-month contract simply falling back from its test of resistance at the October 2015 high of $50.92. June's rally had already reached a peak of $51.67. The only real change may have occurred in corn, where previous indications of an uptrend may have given way to the market slipping back into a long-term sideways trend.

The latter two markets, and corn more so than crude oil, had seen heavy noncommercial long-liquidation heading into Thursday's Brexit vote. This activity was only heightened by the results based on the old rule that investors don't like uncertainty. And if nothing else, market action Thursday night into Friday morning created uncertainty. Short-term, knee-jerk reactions don't always create long-term trend changes. It's possible, meaning it would not be a surprise if, crude oil could actually post a new high before the end of June.

But what about corn? Brexit was only the second hurdle of three this month, following last weekend's weather forecast change and before next week's Quarterly Stocks and Acreage Updates reports. Barring an enormous surprise, it seems unlikely corn will follow the lead of gold and crude oil. That may have to wait for July, with the continued fireworks of weather and interest rates expected to take center stage again.

Thursday night into Friday morning was historic, chaotic, and infinitely interesting. As that same friend said on Twitter, “A lot of people are going to wake up broke.” He may right, but it could have been worse. At least for now the night didn't seem to have a Black Swan glide by.

 




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