PM/BREXIT Market Commentary - 6/23/2016

davefairtex
By davefairtex on Fri, Jun 24, 2016 - 4:00am

Prior to the vote results being known, gold had dropped -9.60 to 1259.30 on moderate volume, and silver rose +0.05 to 17.38 on very light volume.  Gold had sold off steadily all day long, with traders fully expecting a Remain result for the UK referendum.

That didn't last long.  A few hours after the US market close and Asia opened, the first hints of trouble came: there was a $10 pop in gold at around 19:15 Eastern.  And then it just built from there; several cup & handle breakouts, and then gold just started to go vertical - at one point, gold moved $50 in about an hour, with gold finally topping out at $1362.60 at 23:51 Eastern, around the time the media in the UK declared that Leave had won the vote.

Gold promptly sold off after the victory was announced.  Its generally a better idea to "sell the news" rather than buy it.  Once the results are known, there is no new information to drive prices: it is not as though the UK could exit the EU again.

Today I'll have to drag in screenshots from my trading app, since stockcharts.com doesn't update their futures contracts intraday.

On the chart (GC Aug 2016 futures) we see that at yesterday's close, gold had come to rest on its 50 MA after a day of relatively light volume.  The partial day today (with my snapshot happening at about 01:20 Eastern) shows a large volume day already - and this is with only 8 hours of trading so far.  Gold has clearly broken out above the previous high at 1318.90, and at the time of the snapshot was trading at 1336.60.  This was a $73.50 move in gold off yesterday's close, or 5.82%, with the high being more than $100.  And given the dollar is up about 3% today also, that make the net gold move in USD terms about +9%.  Incredible!

Gold really needs a close above that previous high 1318.90 to maintain its upside momentum.  I can only imagine what the miners will do once trading opens in NY.

Silver was doing better than gold through yesterday's close, but the impact of BRExit did not affect silver nearly as positively as it did for gold.  Silver just doesn't have the same safe-haven appeal that gold does.

On the chart (snapshot taken at 01:51) we see a breakout to new highs, with silver touching 18.37, but silver could not hold onto most of its gains.  Part of the problem is large moves in oil (-5.29%) and copper (-2.80%) which both tended to pull silver lower.  It was a good day for silver, but not a great one.  You can also see the volume for silver was substantially lower than the volume for gold, relatively speaking.

Miners have yet to update; yesterday GDX fell -1.10% on moderately light volume, while GDXJ rose +0.08% on moderately light volume also.  Basically - nothing happened.  We could see as much as a 10% move in the miners tomorrow assuming gold can keep its gains through the London session.

Today, platinum is currently up +15.70 [+1.62%], palladium is down -12.05 [-2.12%], while copper has fallen -0.066 [-3.08] and is now trading at 2.09.  Of the three metals, copper is most important - unlike gold and silver, copper definitely did not like BRExit, and is currently below its 9 EMA.  You can really see which metals have "good safe haven" characteristics after today.  Gold is best, silver is good, platinum is just ok, while palladium and copper both trade as industrial metals.

Through the close yesterday, the buck fell -0.23 to 93.53, printing a bullish takuri line candle.  This may have been a tell - today, after the first 8 hours of trading, we see the buck up a massive +2.61 [+2.69%] to 96.02.  The buck has cleared its previous high.  Today, GBP dipped below the 2009 crash lows.  The currency moves today were nothing short of astonishing, and I expect there will be some trading casualties that will appear in the following weeks.  Market was very clearly stunned by Leave's victory.  The different currency moves vs USD were as follows:

  • GBP: -8.22%
  • EUR: -3.13%
  • AUD: -3.05%
  • CAD: -1.82%
  • JPY: +3.59%

Yesterday, WTIC rose +1.13 to 50.13, but that was before BRExit; currently [02:42 Eastern] crude is off -2.24 [-4.47%] to 47.87, coming back from a more dramatic sell-off to 46.70.  Crude definitely did not like BRExit, printing its lows around the same time victory was declared for Leave.  That said - I'm just guessing here - that traders will eventually buy the dip in oil.

SPX rose +27.87 to 2113.32, but of course that was before BRExit; after hours, the e-minis are down right now -94.25 [-4.43%] to 2011.25, actually up slightly from the dead lows of 1999.00.  From what I can tell, a circuit breaker tripped after a 5% move in the minis - trading was halted for 30 minutes.  After trading resumed, prices recovered somewhat.  Perhaps our friends at the PPT are in there buying the dip.  This was definitely a plunge, and if I were long, you betcha I'd want to see some protection!  Yesterday VIX fell a huge -3.92 to 17.25, but after BRExit, VIX is now +8.00 to 24.65, a massive 48% rally.  That's not something you see every day.

TLT fell -1.14% during yesterday's trading; however after BRExit, the 30 year treasury futures are up a huge +3.78% suggesting that TLT will probably make a new all-time high when the market opens tomorrow.

JNK rallied +0.74%, but that's yesterday's news.  We have no junk bond futures (that I know of) so I don't have a sense as to how dramatically JNK will move - I'm guessing prices move lower.

CRB rose +0.89%, moving commodity prices back almost to the prior high.  I don't think that will last, especially given the big move lower in oil.

So where to from here?

If you think about it, nothing really happened to the UK today.  All the people - still there.  Land, cities, factories, all remain.  The risk is all about commerce and connection.  Will the EU shut off commerce?  Any European company that exports things to the UK will not want this to happen, and as angry as the EU politicians are right now, the companies will have their say.  EU has a trade deficit with the UK - will they want to lose this?  Probably not.

But the bureaucrats in Brussels could still be vindictive and try to punish the UK for its departure, "to encourage all the others" not to leave.

In some sense, this was a referendum on the EU itself - on its structure, immigration policies, regulations, and the public perception of an unaccountable, unelected body ruling essentially by decree.  The bureaucrats in Brussels are definitely not used to people voting; just the act of voting makes them angry - and this vote was a "no" vote.  They could shove the Greek referendum back down the throats of the Greek politicians, but the UK is most definitely not Greece.

Will "punishment" and ego trump economics?  If commerce stops, both areas will be hurt, and Europe is already having problems.  The longer the uncertainty and/or the "punishment" goes on, the less growth there will be for everyone.  Its just my guess - I suspect there will be a lot of noise by Brussels and if the UK leadership is clever they will allow Brussels to save face, but where the rubber meets the road, they will come to some kind of agreement to avoid economic dislocation that would hurt both sides.

Throughout history, nations have left trading blocs, currency blocs, and life goes on.  This too shall pass, although we might get to see a departure by Northern Ireland or perhaps Scotland from the UK.  They both really wanted to remain in the EU.

Ultimately, the Eurozone will break up, simply because it must.  At that time,  currency moves will have a much larger effect on the dollar because the Euro is a much larger currency than the Pound.  Those of you expecting the dollar to turn to confetti any moment now (hyperinflation 2016!) should take heed from what happened here today.  The pound is a relatively small currency, and there is no existential threat to the UK or the Pound, and we got a 3% move in the buck.  When the Euro finally starts to go, the buck could easily see a 5% one-day move.  Maybe more.  Maybe even a steady series of such moves.  Big money will look for a place to hide, and it sure won't run to the RMB or the Ruble.  And in that circumstance, I also think the Pound will be a safe haven also, at least to some degree.

And gold.  Gold is officially a safe haven too - especially for us little people.

It will be interesting to see what comes next.

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