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Cash Strategist

AgriVisor is a regular expert contributor to FarmWeekNow, providing market insight and agricultural industry intelligence weekly in FarmWeek Digital.

PUBLISHED IN FARMWEEK
M​onday, June 27, 2016

BrexitGraphicAgrivisor

​That was a shock...Brexit

 

The Brits went to bed Wednesday night little worried about the looming vote, while traders continued to think all was well Thursday.  But the British public voted on Thursday’s referendum to remove themselves from the European Union.  To say no one expected that would be an understatement.

This vote is just the beginning of the transition.  The process will take 2 years once the process under Article 50 begins.  With Prime Minister Cameron resigning his post, it will not start until the new one is in place.  Still, much of the political/economic repercussions of the transition will likely be built into markets before the legal undertakings begin.

Interestingly, the market impact of the vote result fit with the short term cyclic structure in commodity indices.  Along with the long term 3 and 9 year cycles, there’s a semi-annual cycle for commodities, a cycle that had been due to bottom sometime in early July. 

The Continuous Commodity Index (CCI) declined 5 points on Friday.  Had it not been for the $50-$60 rise in gold and $.40 jump in silver, it would likely have declined even more.  Ultimately, we wouldn’t be surprised to see it drop as deep as 400-410 as it puts in this semi-annual low.

But amid the “risk off” attitude, and talk about the negative repercussions for the world economies, we continue to believe commodity prices should hold up relatively well. It was just this year that long-term investment money started to move back into commodities. 

In the first 4 months of 2016, long term investment in commodity vehicles jumped 30 percent.  The current $220 billion total still pales in comparison to the $439 billion in commodity investments at the 2012 peak.

Given the playing field going forward, money might still flow into commodities as a diversification from risk in other sectors.  Prior to this week’s events, there already was worry about the strength in world economies.  Equity markets were still relatively robust, but the yields were still low.

The result of the British vote, and the impact on our equity/financial markets is likely to table any possible Federal Reserve tightening of monetary policy this year.

Even though money surged into the Dollar in the wake of the vote that was simply a move to safe haven for now.  The absence of higher interest rates may cap Dollar strength.  Ultimately, that could help spawn inflationary tendencies.  Meanwhile, ratios between equities and commodities indicate that commodities are still relatively cheap.  Hence, the potential attraction of investment money to commodities in a move to diversify holdings over the next number of months.

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