“Brexit”, the word continued to keep global markets involved and horrified from the past few days and when reality happened it spooked the financial world in a massive way. Britain is the first state to leave the 28-nation European Union since its foundation.
Now, the billion dollar question is that are the markets overreacting. Will it continue to impact on the trade behaviour? If so,… how long? As per estimates, $2.08 trillion has been wiped off from the global equity markets after Britain voted to leave the European Union. It was the biggest daily loss ever, trumping the Lehman Brothers bankruptcy during the 2008 financial crisis and the Black Monday stock market crash of 1987, according to Standard & Poor’s Dow Jones Indices.
The recovery in the commodity prices, which was seen in recent months, got badly hit due to Brexit. Wild moves were witnessed in almost all the commodities. Market participants ran for safe haven buying and thus bullion counter saw a magical upside in the prices; it hit 6 per cent upper circuit.
On the flip side, energy counter traded in lower circuit and base metal counter too panicked. In Comex, it breached the mark of $1,325 and in MCX, it crossed the upside level of Rs 31,700 per 10 grams. Even silver witnessed gains and traded near Rs 42,700 per kg in MCX.
Currency reaction was equally strong. Dollar index jumped from 93 to 96; a rare intraday upside in the recent months. The British pound was down by more than 9 per cent. Indian rupee posted its biggest intraday fall since August 2015, breached the mark of 68.10 against dollar. In the energy counter, earlier crude traded up on little hope that Britain will stay with the EU, but soon after the result, it lost its previous luster.
Europe accounts for 1/4th of the total world GDP. The Britain exit from EU economy may shake the global growth. For example; Europe accounts for about 14 per cent of global oil consumption. If Europe as a whole suffers from a Brexit-related jolt to confidence, the impact would be more severe. If Britain’s vote triggered political upheaval in other countries, it will jeopardise the future of the EU itself and perhaps other trade zones and may disturb the trade environment.
With recent twist and turns, Britain is going through the most turbulent political uncertainty for sure. With the global economy likely to take a hit, it could curb demand for raw materials from oil to copper, dragging down prices again just as many were regaining favor in recent weeks.
Gold is back in something of a sweet spot as markets now doubt that US interest rates will rise anytime soon. Brexit and Chinese slowdown is certainly going to affect the Fed decision to increase the rate. It won’t be that easy as currency volatility may result in some volatility in commodities counter.
Furthermore, World economic growth, which was anyway sputtering, will be further dampened. Brexit affects the rupee through both trade and the financial channels.
(The author is Associate Vice President (Commodity) at SMC Global Securities)