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Pulse Price Report: One Week After Brexit

 

On June 23, the United Kingdom sent European politics and the global financial market into turmoil following the vote to leave the European Union (EU). Over the next couple of years, Brexit (a moniker for “British Exit”) will take effect, separating one of the strongest nations in the EU from the tumultuous union across the English Channel.

Political conservatives generally supported the decision while liberals, including President Barack Obama, rejected it. Many economists derided the vote, with The Economist sub headline on the result reading, “How to minimize the damage of Britain’s senseless, self-inflicted blow.”

But putting politics aside, here is what has actually happened to the markets in the week since the referendum.

On Monday, the British pound hit a 30-year low at $1.3121 against the U.S. dollar. Some analysts say the pound will equal the dollar for the first time in history by the end of this year.

A weak pound has pros and cons. Since British assets have not been this cheap in 30 years, there is an incentive for foreign countries to buy British goods. British exporters, or those creating goods in Britain and selling them abroad, can increase their profit margins by attracting buyers with lower prices or increasing profit margins with reduced production costs.

The British consumer is the first loser in a weaker pound. Imports such as food and raw materials will increase while vacations to Paris or the United States just became more expensive.

Shares in two of the nation’s banks, Barclays and Royal Bank of Scotland, were suspended on Monday after seeing sharp price declines. The FTSE 250 Index, which gauges the strength of many domestic businesses in Britain, is down 14 percent from the end of the day on June 23.

In the United States on the day after the vote, all three major market indices – the Dow Jones, Standard & Poor’s 500 and the Nasdaq – fell 3.4 percent, 3.6 percent and 4.1 percent, respectively. Those losses continued on Monday with an estimated $800 billion hit on U.S. market value.

Meanwhile, safe haven investments such as gold and government bonds saw a boost as investors hide from the volatility. Much of that volatility lies in the murky future of Britain’s free market. Prime Minister David Cameron, who wanted to stay in the EU, resigned the day after the vote, dashing the hope of a smooth political transition. No longer a member of the EU, Britain may have also closed its free-trade borders to the single largest market in the world.

Some analysts expect this to be the beginning of the end for the EU, as stronger nations such as France and Denmark follow Britain out in hopes of releasing the shackles of the weaker EU nations. Those weak EU nations, such as Greece and Italy, may also seek an exit to escape the regulations and fines sent down from officials in Brussels.

In theory, the British government could ignore the vote and do nothing. The referendum called for by Cameron was advisory, not binding. British Parliament still has to vote to leave the EU and they are not legally bound by the vote of the citizens, although it would be a hard thing to push aside.

The EU began in some form around 60 years ago, with the first agreements created by the Treaty of Rome in 1957 to open a common market across Europe. Britain has always been a special case within the EU, the most obvious case being the rejection of the euro currency in favor of the pound. Now, the nation has distanced its island from the Continent even more.

 

Crop prices (June 28)

Rio Creek Feed Mill – Algoma

Commodity Price (per bushel) Basis
Corn $3.44 -0.41
New-Crop Corn $3.46 -0.48
Soybeans $10.50 -0.83
New-Crop Soybeans $10.30 -0.75
Wheat (SRW) $3.93 -0.54

 

Fox River Valley Ethanol – Green Bay

Corn $3.44/bushel -0.41
New-Crop Corn $3.49/bushel -0.45

 

Basis: The difference between the local cash price for a commodity and the Chicago cash price (where the Board of Trade sets national futures price).

 

Gas Price Averages

United States: $2.30

United States one year ago: $2.77

Wisconsin: $2.39

Wisconsin one year ago: $2.76

Northern Door: $2.64

Sturgeon Bay: $2.57

 

Other Commodities

Gold: $1,317.90/troy ounce

Silver: $17.84/troy ounce

Oil: $47.39/barrel

 

Sources: aaa.com, agweb.com, gasbuddy.com, cnn.money, The Economist, MarketWatch.com

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