Brexit Panic Helps Gold But Rising Dollar Hampers Huge Gain

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The hurricane winds created by the “Leave” vote in Great Britain regarding the European Union continue to buffet world markets.

Gold rose into the 1330s overnight but has since dropped back on profit taking and sentiment that the rally in the yellow metal can’t last.

We think the Brexit fallout is going to be with us for some time – either till the divorce is final or until there is a second referendum, which is a complicated solution but a better one for Great Britain and the world.

A petition there has already garnered more than 3 million signatures.

The New York Times explains it thusly:

“A petition with more than 10,000 signatures gets a response from the government, while one with more than 100,000 signatures must be considered for debate in Parliament.

“The petitions go through a committee, which can press the government for action, put forward a petition for debate or refer the matter to another committee.

“The petition calling for a second referendum on European Union membership has reached 30 times the number of signatures necessary.

“‘Any petition that gets more than 100,000 signatures is considered by the Petitions Committee,’” Alan Renwick, a political scientist at the Constitution Unit at University College London, said on Monday. “‘The committee will meet tomorrow, and they will then consider if it should be taken for full debate in Parliament. There is no guarantee that anything happens, but most likely, they will suggest some kind of Parliament debate. They could suggest a debate on the referendum rule more generally, too.’”

Meanwhile in the world of equities, Europe and the U.S. are taking baths, although in New York, prices seem to have stabilized so at least smelling salts are no longer needed.

Asia appears to have been immune to the contagion overnight.

The Nikkei index, in spite of another chunky rise in the yen, was up 2.40%. Shanghai was higher by 1.45%. Hong Kong’s Hang Sen, because of its strong ties to London banking, was off slightly. That the Nikkei should be a beneficiary of today’s turmoil is odd.

Masataka Kunugimoto, an analyst at Nomura, said the Brexit will have major negative impact on Japanese automakers. A stronger yen makes exports less competitive.

Kunugimoto went on to say in an advisory to clients that he estimates that, “The aggregate operating profits of Japanese automakers will be reduced by 84.9 billion yen ($833 million) for each ¥1 of yen strengthening versus the US dollar, ¥9.7 billion for the same versus the euro, ¥1.5 billion for the pound sterling, ¥11.9 billion for the Australian dollar, and ¥5.4 billion for the Canadian dollar.”

The euro is off almost a full percent against the U.S. currency and the British pound is down 3.75%.

West Texas Intermediate crude had slipped below $46 per barrel on dollar strength, but also because many fear that the British exit from the EU will further slow already sluggish world economic activity and therefore demand for oil. Late in the regular trading session, however, oil recovered.

In after-session trading, WTI is down 1.90% ($46.70) and Brent North Sea is off 1.75% ($47.58).

Sensing a need for safe haven plays beyond gold and the yen, traders pushed the U.S. 10-year bond’s yield down 1.45% as face prices rose.

Tomorrow we believe that bargain hunters will come forward in Europe and the U.S. markets. We think they will shift from Japanese equities, which have problems of their own due to yen power, as described above.

We’re not taking political sides where, but his handling of and his pronouncements on the Brexit have hurt Donald Trump. As a candidate for the most powerful office in the world, one should not be praising a move that is ripping a great country apart as it damages the world’s economy. We think acting and speaking soberly while figuring out what move comes next is the proper approach.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer