Markets ignite as Brexit dominoes begin to fall

Advertisement

The US dollar rebounded strongly last night as Brexit dominoes began to fall in Italian banks, oil prices and UK property:

tvc_1c7be4fb4b0b52fa4bc727a0f1874b54

The yen is unstoppable and hinting at carry trade crisis reversal. Zombieuro was hammered. The Chinese yuan may not be in free fall but it’s falling awfully fast. This is a major problem for markets if it persists. China is not stimulating by spending more it is doing so by dropping the currency which is a terrible outcome for commodity prices as it both denudes them of more Chinese building and makes China’s dirt much cheaper. It is my second domino for a Brexit-triggered end-of-cycle shock:

tvc_4901780da5b6ae1f0da0a5fb8920badf
Advertisement

Commodity currencies were pounded quite rightly:

tvc_5c762e3cd6ad837eed69546f76bc0762

Gold was very impressive as it gave the US dollar the bird at new closing highs threatening break out:

tvc_55636d8059a615e0f03e7bebad8f841d
Advertisement

Oil was clubbed as the supply glut worries rage back. This is the third major domino in my “end of cycle” thesis and in my view it is going to keep falling here:

tvc_7f7b0ea4975ec610b12852c3900f65ca (1)

Base metals ran into reason:

Advertisement
tvc_ed3f3e591d50feef16c82988d4286c4e

Big miners too:

tvc_308fb810b4b81442f5faeaaefbfd8317

High yield did not get the memo:

tvc_1ea0a75766b6554b6deb6b654923bdb9

Stocks took a decent hit:

Advertisement
tvc_42c2e76f92928dcd0fc7de40780f9235

Bonds raged higher:

tvc_f718ddd8e73e66726962662e4c90ac9a

It’s worth repeating my triple-whammy end of cycle thesis:

  • if Brexit triggers a European banking crisis then global bank funding costs will rise through H2. We’re seeing that in Italy;
  • China is going to slow in H2 and if it stimulates via a falling yuan rather than more building then commodity prices will be double hammered;
  • the oil market has rebalanced temporarily on supply outages and they are resolving in Nigeria, Canada and even Libya potentially. If oil falls then so will global high yield debt.

The collision of the Mining GFC and Brexit would trigger a combined European based interbank credit crisis and global high yield debt seizure based in the US and emerging markets, and crash stock markets.

Advertisement

We’re a lot closer to it today than when I floated it pre-Brexit!

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.