First, a recap of the events of the last few months that have had major impacts on commodity markets:
- Thursday, June 23, 2016 – BREXIT - UK voters sent shockwaves through global markets with a vote to leave the European Union.
- The outcome of the “Risk Event” exposed a very dangerous economic fault-line with a high probability of not only future EU contagion but global contagion becoming increasingly problematic.
- Markets: Domestic and global market deflationary forces were magnified by BREXIT and accompanying events, creating elevated levels of risk and uncertainty.
- These elevated levels of market risk and uncertainty translate into uncertain market directional price moves and evolving complex chart patterns.
Contagion: Refers to the situation in which social, political, economic, etc. problems in one country, as in the United Kingdom, has a high probability of becoming a problem in member countries of the European Union, other regional neighbors, and even countries globally.
Expected Event: A BREXIT type event was expected, the country and timing of the events arrival was the unknown.
- As for the actual BREXIT event, the political and financial elite did not expect the arrival of the beginning of the exodus of the United Kingdom from the European Union so soon, but now the process has begun.
United Kingdom: The United Kingdom has their own internal separation challenges, being made up of England, Scotland, Wales and Northern Ireland.
- At some point Scotland and Northern Ireland will vote to leave the United Kingdom. Reality is they will leave, the timing is the unknown.
Social Mood: The ongoing global economic slow-down has social mood globally signaling political leadership that the time for change has come.
European Union: For the EU this is the beginning of the end of the Union, a politico-economic union of 28 member states that are located primarily in Europe, which is an area of 1,669,808 square miles and a population of over 510 million.
- The unknown is the unwind speed. Be it three, six or nine years, it’s important to understand the process has begun, and the movement is highly contagious both regionally and globally.
- Most likely sooner rather than later (one to three years) Portugal, Italy, Greece, Spain, Netherlands, France, etc. will all have their own referendum to stay or leave the European Union.
Immediate Post BREXIT vote market Impact:
- Market participants embraced the safety of the U.S. dollar, U.S. Treasuries, and gold.
- Rice, cotton, soybeans, corn, wheat and oil experienced price weakness, which was totally expected given the leave vote, as preferred risk assets like U.S. equities and commodities mostly saw price weakness as markets moved into a risk-off mode.
Today’s Market Challenges:
Currently, the outcome of the BREXIT vote is responsible, in part, for increasing levels of price risk and uncertainty in the market
- To see how commodities have responded following the BREXIT vote, click on http://deltafarmpress.com/datasheet/brexit-eu-contagion-commodity-impacts.
- Today’s domestic and global markets “Post BREXIT” are being shaped by negative social mood in country after country around the world.
- The negative social mood is a function of a slow growth, low interest, debt-crushing global economic setting.
- Given today’s domestic and global economic setting, bond, equity, commodity and currency markets can be dangerously volatile and highly emotional given fundamental, technical and fiscal and monetary policy considerations.
- All involved in fiscal and monetary policy, markets, and social issues must now give greater consideration to a global marketplace adjusting to slow global growth with building political, social, and economic risks, building market uncertainties and a potential BLACK SWAN event.
BREXIT was a pivotal historic event:
The United Kingdom-European Union membership referendum or BREXIT vote where UK citizens decided to leave the European Union with 51.9% voting to leave to 48.1% voting to stay will reverberate for years to come.
Why did UK voters decide to leave and why will other EU countries leave at some point?
United Kingdom voted for control of their national destiny, sovereignty, taxation, immigration, etc. They said thumbs down to building repressive socialism and European Union oversight and thumbs up to renewing their relationship with democracy and capitalism.
- What’s to fear? Democracy and capitalism fail to win popular support.
Make no mistake this process will be painful and slowly implemented, but potentially rich with future economic and social rewards.
Socialism: Today’s advanced European socialism is burying Europe’s economic and social future under unsustainable debt.
Leaving EU a two-plus year process
UK voted to start a two-plus year process of breaking away from building intrusive dictatorial European Union/Brussels controls and demands.
- No country has ever left the European Union, so the process is filled with dangerous knowns like political reprisals and unknowns such as a potential Black Swan event or events.
- Risk and Uncertainty: Elevated levels of social, political and economic market risk and uncertainty are now recognized by a broader group of market and other participants.
- It was a given that this type of event would happen, what was not known was when and where.
- Now we have the challenges of understanding the broader impacts as this risk event will serve as a catalyst for future economic, political and social change.
- Trend Change Underway: Building global debt deflation, now recognized by a larger body of market participants, has global markets adjusting to a sustained period of slow global growth and negative to low interest rates.
- This new normal in a sustained period of anemic domestic and global growth is the genesis behind building political, social, and economic risks and building market uncertainties and potential Black Swan events.
- Separatists’ Movements:
- Do not underestimate the relationship between economic uncertainties and declining social mood throughout the world. Their impact on separatists’ movements and markets are strong.
- These movements in the European Union and globally are on the rise. This is simply a symptom of anemic growth in country after country around the world.
- Governments and Central Banks:
- Globally governments and Central Banks are in crisis management mode.
- One certainly should not underestimate their ability individually or collectively to respond and intentionally or unintentionally to influence markets.
- Additional Risk Protection: The size of the market wave generated by their intervention will cause many to add an additional layer of risk management protection.
Near Term Market Impact:
U.S. 10 year Treasuries likely have lower yields in their future, presently yields are range bound.
- Near term the dollar should remain range bound and not have as much influence on market prices as many project. Remember, the Fed has real concerns about reaching and maintaining their 2-percent inflation objective in a stagnant global economic setting. To achieve this objective it would be helpful for crude oil (West Texas Intermediate) prices to trade in a $40 to $60 per-barrel range and the dollar not to rise significantly, as it did on June 24, the day after the BREXIT vote.
- For U.S. equities, corrective price action would be healthy, but building global economic uncertainty is attracting global investors into this area. Near term let price action provide guidance.
- Near-term rice, soybeans, corn and wheat prices continue facing strong balance sheets and strong deflationary headwinds courtesy of a slow-growth, negative-to-low interest, debt-challenged global economy with building social and political uncertainties.
- Soybeans: Further price weakness likely
- Cotton: Bullish price
- Corn: Price in a sideways bottoming process
- Wheat: Further price weakness likely
- Rice: Defining a price bottom
Dr. Coats is a professor in the Department of Agricultural Economics and Agribusiness, Division of Agriculture, University of Arkansas System. E-mail: [email protected]