Bad News: Brexit Vote Carries

A soaring US dollar in the wake of Thursday’s vote by British citizens to secede from the European Union will hamper US export efforts, which could be bad to very bad for the US economy as a whole.

It all will depend on how long the greenback remains elevated in relation to other world currencies.

When the dust of a hard-fought and often acrimonious debate settled Thursday, the contest wasn’t as close as many polls showed.  The vote was 52% to 48% in favor of leaving the EU.

The final count was even more surprising to many who counted on exit polls that showed the vote to remain in the union edging the vote to exit.

CBS News reported this morning that immigration was key in the minds of many voters.  They saw immigrants taking British jobs and/or bringing terror to the island nation.

 

IMMEDIATE REACTION

 

World financial markets had factored in a much narrower vote, and the extent of the victory was a shock to many.  Tokyo stocks dropped more than 7%, London’s FTSE fell 8%, crude oil and US stock futures also were hit.

As might be expected the British pound fell more than 10% against the US dollar.  The Japanese yen also surged.  The US dollar rose 1.7% against a basket of currencies as investors sought a safe haven.

And the breakup news doesn’t stop there.  CBS news also reported that other nations could now hold their own referendums to leave the EU, and that nationalists in Northern Ireland and Scotland, which voted heavily to remain in the EU had renewed calls for separation from the UK.

The destabilizing effect of the exit vote was being felt in Chicago commodity markets overnight.  Key chart support for many agricultural commodities was melting away, and prices were down hard.

The thinking among many was that a sharply higher US dollar and the pain of renegotiating contracts over the next two years (the time necessary to extricate the UK from the EU) would be hard on US exports.

 

IMPLICATIONS

 

Many investors feel the exit of the second largest economy in the EU could send the British economy into a deep recession as it pulls away from its largest trading partners.  The ripple effect also could send the US economy into recession, some say.

The vote may even spur a breakup of the UK itself, and Scotland and/or Northern Ireland could move to join the EU on their own.  At the very least, all trade contracts will have to be renegotiated since they currently rely on a unified European block rather than a British or continental flavor.

The central issue of immigration in the UK debate also could send the issue to the top of the heap in the US election.  The different rhetoric of the two presumptive US presidential contenders may make a difference in the November vote.  It also could make a difference in a Donald Trump or Hillary Clinton presidency.

 

CASH CATTLE MARKET $4 TO $5 LOWER

 

Cash cattle markets this week were $5 per cwt lower than last week at mostly $116 on a live basis and at $184 to $186 on a dressed basis, down $12 to $13.

The USDA’s choice cutout Thursday was $1.62 per cwt lower at $215.46, while select was off $0.01 at $198.34.  The choice/select spread narrowed to $17.12 from $18.73 with 124 loads of fabricated product sold into the spot market.

The CME Feeder Cattle Index for the seven days ended Wednesday was $140.86 per cwt, down $0.75.  This compares with the Aug settlement Thursday of $142.38, up $2.20.