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Brexit impact: Next few weeks could see volatile markets

In the last fortnight, investors across the globe were busy speculating the ultimate result of the EU referendum. All the polls and initial vote count showed a major lead in 'remain' camp.

Naveen Mathur | June 27, 2016 | Updated 21:37 IST

Naveen Mathur
In the last fortnight, investors across the globe were busy speculating the ultimate result of the EU referendum. All the polls and initial vote count showed a major lead in 'remain' camp. However, the tables turned on 24th Jun'16 when the voters of Great Britain decided to withdraw from the European Union. Even the British PM announced his plan to resign and leave the discussion of 'Article 50' of the Lisbon Treaty on the shoulders of his next successor. Hence the coming few weeks could be very volatile for the markets.

The ECB President has assured the markets that excessive volatility arising out of the Brexit outcome would not keep the central bank away from entering the markets and arresting the impulsive price swings. He also said that "further monetary policy stimulus (was) in the pipeline.

The Indian Rupee depreciated by 1.39 per cent in the last fortnight owing to strength seen in the US Dollar Index which saw a major incline given the recent Brexit event. Moreover, sustained selling of the American currency by importers and banks amid higher dollar in the overseas markets dragged the currency further lower. The surprise announcement by the RBI Governor to not seek a second term has led to huge outflows of funds from the financial system. This acted as a negative factor for Indian markets and its currency.

The yellow metal has traded positive by around 3.27 per cent in the past fortnight while MCX gold has gained by around 4.38 per cent.

Prices hit its highest in almost six weeks, rising on worries about a potential British exit from the European Union and expectations the U.S. Federal Reserve will not raise interest rates at its June meeting. As expected they did not raise any interest rates. The focus of the markets then shifted towards Brexit. Polls by ComRes, conducted for the Daily Mail newspaper and ITV television, and by YouGov for The Times newspaper in London, showed a last-minute rise in support for Britain to remain in the EU. However, surprising results from Brexit that it will leave the EU block led the rally in gold prices last week.

LME Copper prices surged by 4 per cent, the most amongst non agri commodities in the last fortnight, as investors across the globe widely anticipated the EU referendum to end with REMAIN campaign, spurring demand for risky assets. Further, bets for fewer rate hikes in the US rose after the International Monetary Fund cut its forecast for U.S. growth this year to 2.2 per cent from 2.4 per cent in April, adding that Fed should proceed on a "very gradual" path in raising its benchmark rate. However, China, the world's top producer of the refined metal shipped out a surfeit of metal at home. China exported 84,959 tonnes of copper in May, up by 256 per cent from the same month last year. MCX copper prices gained 5 per cent in the last fifteen days.

WTI oil prices declined by around 2.9 per cent while Brent crude declined by 4.21 per cent in the past fortnight. MCX oil prices rose declined by around 1 per cent in the same time frame. Drawdown's in U.S. crude inventories over the past month have not provided much support to oil with investors focused more on a possible rise in production as Brent and WTI traded above 50 dollar a barrel each. U.S. energy firms added rigs drilling for oil for a second week in a row last week. Worries Britain might leave the European Union while the U.S. Federal Reserve signalled plans for two U.S. rate hikes this year despite slower growth expectations. Goldman Sachs said in a note that crude would need to trade at 45-50 dollar per barrel for the market to reach a supply deficit in the second half of 2016. The world's largest oil exporter and OPEC heavyweight produced 10.262 million bpd in April, compared with 10.224 million bpd a month earlier, the data showed. Potentially adding to supply, Iran has increased its crude exports capacity at its main terminal on Kharg Island to allow eight tankers to load simultaneously.

Outlook

Gold prices will trade higher as the uncertainty across financial markets with regards to Brexit which has finally happened will lead to safe haven appeal for the yellow metal. Increasing investment appetite as seen in the inflows in the SPDR gold trust will also act as a positive factor for gold prices.

Although, crude inventories in the US are showing signs of drawdown, increasing exports from Iran and Saudi, the two biggest member of the OPEC bloc will create further oil glut in the markets creating pressure on oil prices in the coming fortnight.

We expect base metal prices to trade lower owing to risk aversion mode after the shocking result of BREXIT in the latest EU referendum.


After 10 days of delayed monsoon, it has made speedy progress in the central and western part of India. The overall rainfall has been 18 per cent below normal as per weather department's weekly update report. The progress of monsoon is satisfactory and conditions are favourable for further advance of southwest monsoon into remaining parts of west Madhya Pradesh, west Uttar Pradesh, most parts of Haryana, Chandigarh, Delhi and Punjab and some parts of East Rajasthan during next week or so.

Despite considerable progress in monsoon rains, sowing of kharif crops slowed down further according to Government data release last week. In the third week of June, the total area sown falling by almost 24 per cent to 124.94 lakh hectares (lh) compared with 164.10 lh at this time last year.

During the last fortnight, among agri-commodities, the prices of Maize surges the most on Indian futures exchange followed by the spices- Coriander, Jeera, Turmeric and cardamom. Maize prices jump more than 15.5 per cent due to good domestic demand, as supplies are limited in the country due to lower production during kharif and Rabi season in 2015-16. Moreover, strong demand for the poultry feeds is another reason behind the firm prices.
Agri-commodities, which made losses during the last fortnight, were Crude palm oil (CPO), soybean and guar seed.

Prices of all the spices traded on futures exchange increased due to short supplies and good export demand. Coriander and Jeera jumped 7.3 per cent and 6.2 per cent respectively on anticipation of good export demand in coming months, as supplies have been stagnant in last one month or so. Similarly, turmeric and cardamom also traded higher on reports of good physical demand. Cardamom new season supplies may affect due to dry weather in cardamom growing areas during March - April. Turmeric prices have been in range bound as monsoon has already covered the sowing areas and physical demand is satisfied through last year crops.

Among softs, cotton and kapas prices traded lower mainly due to profit booking but the spot prices have been at higher levels due to good demand from the domestic textile mills. Moreover, in the kharif sowing progress for cotton is behind the last year sowing progress by about 45 per cent. Similarly, Sugar Futures traded lower due to sufficient availability of sugar due to government policies on sugar exports and stock limits.

Among oilseeds, Mustard seed and soybean mostly traded sideways as monsoon rains increased the chances of good sowing progress of soybean. In Maharashtra and Vidarbha, farmers have begun sowing but the reports of the quantum of sowing are not significant. This season, however, farmers may shift to other crops such as pulses and maize. While mustard seed prices have corrected at higher prices during the last fortnight from the higher levels. The mustard prices moved higher earlier on anticipation of limited supplies during the monsoon and good demand for oil from industrial buyers for winter use.

Among other commodities, Guar seed and guar gum prices moved lower on forecast of better monsoon rains in July and adequate supplies of guar seed and guar gum. The demand will be steady during the monsoon as market participants waiting for the actual sowing progress.

Outlook

For the next fortnight, Cotton complex prices may trade higher on reports of lower acreage and increase in demand from mills. Spices like jeera, turmeric and coriander may trade with positive bias to on expectation of supply crunch and good export demand. Oilseed prices trade sideways to sideways to lower due to good monsoon forecast and lower crushing demand. Sugar price may trade steady as government has taken steps to control the prices and increase physical supplies.


The author is Associate Director - Commodities and Currencies Business, Equity Research & Advisory -Angel Broking. Views are personal.

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