Friday July 1st 2016

Brexit

Friday July 1^st  2016

Overview

The unexpected results of the British referendum upon the European Union brought fear and irrationality across the financial markets. Investors since Friday 24^th of June looked anywhere for safe heavens. As a first reaction we saw Gold, Bonds and US Dollar going through the roof whereas we saw a good slump in equities (especially European), a terrible jump down in the GBP/USD and huge volatility in the forex market. As often happens market reaction was exaggerated and during the current week we already assisted to some turn around. 

At a first glance it appears to me that Britain is largely unprepared for an exit with a lot of confusion within the two major political parties. Boris Johnson, “the brexiteer”, pull himself from the race to prime minister as probably the risks of a backfire are too high. What is more, three-quarters of parliament lawmakers support remaining in the EU and there are already calls for Parliament to override the referendum which technically is not legally binding on the government anyway. The EU calls for a quick Brexit but the truth is that yet nobody really knows what is going to happen. The common view among analysts is for a mutual resolution without any big change. New negotiations will be held and there will be no need for a formal Brexit.

Nevertheless on both sides, UK and EU, the consequences could be definitely expensive. England could face isolation as Scotland and Northern Ireland already asked to remain within the EU whereas on the other hand more EU Countries could demand for a popular referendum on the back of what happened in the UK. Further we now have Austria to re-make the presidential elections in September due to irregularities during the votes count. It looks like is going to be a bumpy summer.

Mr. Chairman Mark Carney already indicated of Thursday that more stimulus may be needed over the summer, sparking expectations for an imminent rate cut from the Bank of England. It looks like market, metals included, are pricing in more stimulus from also other Central Banks (FED, BOJ, ECB..) as an inevitable chain reaction. Definitely questionable.

Market data

In terms of market data we had again a fairly light week with most the important economic data being released today: China June Manufacturing PMIs suggest still weakness in the industrial sector with the Caixin at 48.6 vs exp. 49.1 and the Official PMI at 50.0 vs exp 50.0. China’s non-ferrous metals market may have bottomed out but outstanding problems like weak demand and unsustainable price increases is making it difficult for the domestic market to rebound, China’s Nonferrous Metals Industry Association (CNIA) said in a late-June report. Still complicated situation and this last PMI numbers are not very encouraging.

U.S. crude futures are still trading sideways. Despite a good draw of material from the US inventories on Wednesday (-4,05M vs exp -2,36M), concerns over a global supply glut resurfaced amid rising production levels in Nigeria and Canada. In addition, a Reuters survey showed that OPEC production rose to a record high of 32.82 million barrels per day in June. We are now trading around the 48.50$ level.

In Europe is definitely worth to mention the good inflation number standing in June at 0.9% vs exp. 0.8% (YoY) and 0.1% vs exp. 0.0%. What is more, this morning we had the PMIs for June: Spanish PMI 52.2 vs exp. 52.1, French French PMI 48.3 vs exp. 47.9, Italian PMI 53.5 vs exp. 52.5 and the German PMI 54.5 vs exp. 54.4. EUR/USD after a sharp sell-off on the back of the Brexit at 1.0915 is now already more than 2 points higher at 1.1150.

Metals

Metals quickly shrugged off the Brexit novel and even more quickly the Chinese PMIs data. As a matter of fact the complex benefitted from a good wave of buying today after the China PMIs data printing new fresh highs; Copper being still slightly behind but still on the upside. Brexit reaction was brief and unpainful; after an algorithmic-driven sell off buyers rapidly stepped in and enjoyed a good ride up. The fundamentals did not really change much but we need to acknowledge that base metals prices are yet on historically low levels. Funds (CTAs) are moving back in on the back of China stabilization, some renewed expectations of new Central Banks stimulus and probably because re-allocating some money from equities into the base metals. Having said that, good news from China economy are further needed to keep the trend going and convince the funds to keep on buying.

On Ali given the absolute no change in fundamentals but, if anything, a rise in productions (according to IAI) will be interesting to see what is going to happen on the 1686$ level which is the 2016 highs. Around 1680$ may be a good level for profit taking. Copper as expected is not doing much but it looks like to be the more “wise” of the complex not being able to reach the 5000$ just yet. It will probably manage to get there but difficult to see any further upside movement without any good change in fundamentals. Lead finally after ages on sideways trading managed to follow Zinc and took a good swing higher (trading around 1840$ at the moment). Around 1880$ though we may see the bears coming back in. Apparently Nickel is the only one with a decent change in fundamentals; Regina Lopez, the newly appointed head of the Philippines' Department of Environment and Natural Resources, said it will review all mines operating in the country. Since the Philippines has become the biggest nickel ore supplier to China, any disruptions would reduce China's capability to produce NPI. The INSG sees a larger 2016 deficit - it now forecasts a deficit of 49,000 tonnes compared with 23,000 tonnes at its October 2015 meeting - and revised downward its forecast surplus for 2015 to 15,300 tonnes from 29,000 tonnes. Least but not last, also the Steel market in China is looking slightly brighter due to some internal reforms and anti-dumping measures from US and EU. Prices are still very low even at the current 9800$ level; the confirmation of today’s new highs though open the door for the 10500$ mark. Tin and Zinc have substantially unchanged fundamentals. If anything we saw some bearish news on Zinc with higher production from China and higher LME stocks 442000 which went completely unheard with the market at 2150$ (probably overdone). Tin Is still solid at a crucial juncture of the 17500$ new highs are now needed to confirm the uptrend.

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