US markets fell sharply of Friday as American traders tried to reckon with a newly uncertain future in the wake of the shock “leave” result of the UK Brexit referendum.
All the major US markets suffered losses with the Dow Jones diving 608 points, a fall of 3.39%. The S&P 500 lost 76 points, a fall of 3.6% and the technology heavy Nasdaq was the biggest loser of the day, falling 202 points, or 4.1%.
Voters in the UK had appeared to be leaning towards staying in the European Union and stock markets around the world had rallied ahead of the vote. The decision to leave sent the pound into a spiral and triggered a sell off in Asian the European and then US markets as traders woke to the news.
“This bleeds through the EU (European Union) narrative in terms of its unity and its popularity,” said Peter Kenny, senior market analyst for Wall Street firm Global Markets Advisory Group. Kenny said the unease in the markets would likely keep the Federal Reserve from raising rates in the short term, and in the long term the consequences would be far-reaching.
“Effectively what that means is that the Fed is not going to be in the position to normalize rates at the extent they were telegraphing only a week and a half ago,” said Kenny. “They can raise rates once at the most by the end of the year.
Gold prices - which rise in times of uncertainty - jumped to their highest levels since October 2013, rising 8%, while US crude oil prices fell about 7% on fears that the global economy - and demand for oil - would slow.
By the end of the day, August futures of Brent crude oil on the Intercontinental Exchange (Ice) had settled at $48.41 a barrel, while West Texas intermdiate (WTI) futures settled at $47.64 a barrel on the Nymex. August Comex gold futures settled at $1,322.40 an ounce.
US gold futures prices rose as high as $1,362 an ounce as the EU vote results trickled in, and analysts at Commerzbank said the gain, which was about $100, was the steepest daily increase in percentage since the financial crisis in the autumn of 2008. The yellow metal might have risen higher had the US dollar not also gained in the vote’s aftermath, they said.
Friday’s fall in the oil price curbed a generally higher trend oil has enjoyed since prices bottomed around $26 in February. Thursday’s high was just over $50 for WTI as the supply and demand situation for oil started to improve, said Abhishek Deshpande, lead oil market analyst with Natixis.
He said Friday’s drop may be temporary since it’s mostly related to the jump in the dollar and investors moving into safer places like gold and government bonds. The stronger fundamental picture for oil – tightening supply and higher demand may somewhat offset the negative sentiment for now.
In the short-term, confidence on the state of EU economies is key, said Phil Flynn, senior market analyst for The Price Futures Group.
“My guess is [oil] will rebound but it may take some time,” he said.
However, Deshpande said, there’s a question whether demand will hold up longer term, in light of the greater ramifications of the vote.
“In six months time, the larger concerns may come out. It’s really not (just) about Britain leaving … but around Scotland, northern Ireland and the EU countries, the EU project as a whole, that’s a much bigger concern for investors … The economic growth aspects become a larger concern, not just for the UK but the global economy,” he said.
It’s these larger concerns which makes the Brexit vote is a “game-changer” for gold, said Adrian Day, chairman and chief executive officer of Adrian Day Asset Management.
Kenny agreed. Right now, he said, the International Monetary Fund and other international banks have to “play defense” as they tries to calm down markets. But stock exchanges will be uneasy for a long time to come. “[That volatility] is something the market’s going to have to transition from thinking of as a variable to something it thinks of as a constant.”
In addition to the questions about the EU’s viability, the UK will also get a new prime minister who must negotiate cutting the ties with the EU, which will be difficult at best and adds to the uncertainty, Day said.
Joni Teves, precious metals strategist at UBS, cited UBS economic and global strategy analysts who said the uncertainty brought on by referendum could mean more monetary policy accommodation by central bankers, and that’s good for gold.
George Gero, managing director at RBC Wealth Management and a veteran gold trader, agreed.
“A rate hike by [the Federal Reserve) seems extremely remote this time. Gold again proves to be the haven,” he said.
Gold’s short-term retrenchment from the overnight highs isn’t surprising, Teves said, but longer-term gold could rise to $1,400, a figure she has heard in talks with other market participants.
Day concurred. “Earlier (prior to the vote) I talked about $1,400 by the end of the year. I still think that’s reasonable,” he said.
