Brexit Shows Betting Markets Are Not a Silver Bullet for Predicting Elections

“The momentum [is] all behind #Remain,” tweeted out the gambling website Betfair yesterday at 10 a.m. EST. At 4:24 p.m., shortly before the last polls closed, the site was putting the odds that British voters would elect to stay in the European Union at 88 percent. An hour later, the U.K. bookmaker Ladbrokes went even further, tweeting that the odds were 12–1 against Brexit.

The bookies were wrong. By a margin of four percentage points, the country opted to withdraw from Europe’s economic zone.

Proponents of betting markets as an alternative to increasingly questionable old-fashioned opinion polls have some soul searching to do, and they know it: “Those of us who do this for a living will have to face up to some tough questions today,” reads a statement tweeted out by Ladbrokes late last night. “Is this just one of the inevitable, normal occasions where an outside wins, or a fatal blow to the idea of betting markets as being a useful forecasting tool? Maybe unsurprisingly, I tend to think the former, but that doesn’t mean we don’t have to reflect on all of their potential flaws and decide how we best interpret them in the future.”

PredictWise, a prediction aggregator run by Microsoft Research Labs’ David Rothschild, noted on Twitter that “one-shot elections” like this one “really should not affect models for” regularly occurring American general elections like the one that will happen this November. Still, Rothschild too admitted this particular miss by the betting markets is “certainly a good time to reflect.”

One-off elections are indeed notoriously difficult to make predictions about, and events with a 75 percent probability of happening one way will nonetheless go the other way a quarter of the time. But the betting markets’ showing here is troubling in part because many people (myself included) have long been hopeful that their ability to synthesize data from disparate sources makes such markets a more efficient alternative to traditional survey research precisely in those moments where normal polls are most likely to fail.

Instead, the polls were much closer than the markets in this case. The Huffington Post had Remain ahead of Leave by one-half of one percentage point, which is too close to call if ever a prediction was. Not only that, but it was the online-only (as opposed to “gold-standard” telephone-based) surveys that fared best of all. As the HuffPollster data scientist and my friend Natalie Jackson wrote:

Throughout the campaign, the polls diverged, based on whether they were conducted online or by telephone. The internet poll average estimated a 1.2-point lead for “leave,” while live phone polls had “remain” up by 2.6 percentage points. … In this case, the internet polls were clearly more indicative of the victory.

Does this mean we should put all our eggs in the web survey basket from now on? Anyone who thinks so hasn’t been paying attention. The real lesson here is that no two elections are alike, and no one way of predicting what will happen is always going to come out on top. For the same reason savvy politicos look at poll averages (and superstars like FiveThirtyEight‘s Nate Silver make use of highly sophisticated models with far more inputs than just raw survey numbers) the only good way forward is to look at the picture that all the very different information sources are collectively painting—and not to assume too much even from that.

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Hillary Clinton’s Terrible Free Speech Record: Matt Welch on Tonight’s Stossel

Shut up! Already. Damn. ||| ReasonI teased this before, but got the broadcast date wrong. Beloved television host (and Reason.com columnist) John Stossel is devoting his whole show this week (9 p.m. ET tonight on Fox Business Network) exploring the many statist facets of Hillary Clinton. As part of that, he was kind enough to ask me to come on for a segment and talk about the presumptive Democratic nominee’s long and terrible record on all things free speech. The Stossel team unearthed some truly gruesome video clips to help make the point as well.

You can read about our putative Censor in Chief in my March cover story, and in a couple of follow-ups: “Tech/Gaming Journalist: ‘I think’ Hillary Clinton’s ‘war on video games’ was ‘well-intentioned,’” and “Why Are the Newspapers That Condemn Donald Trump’s Free-Speech Rants Endorsing Hillary Clinton?” It’s also worth remembering something I didn’t mention in any of those pieces: She also led a futile charge to recriminalize flag-burning as recently as recently as 10 years ago this month.

And lest you think Donald Trump is a comparative free-speech champion, read some Damon Root.

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Friday A/V Club: The Brexit Video

One of the odder items in the Kinks’ catalog is “Down All the Days (till 1992),” a 1989 song that the Common Market Commission adopted as an unofficial anthem to promote European integration. The music is bombastic—someone once said it sounds like a Pepsi commercial—and you can see why a Eurocrat would like the lyrics: “Down all the days/All nations will unite as one/A new horizon clear to view/Down all the days to 1992.”

But the man who wrote the track, Kinks leader Ray Davies, was actually a Eurosceptic. (He says this explicitly in his memoir Americana, but anyone familiar with his work would expect it.) When The New York Times asked him how he felt about the commission adopting his song, he commented that it was “part of an album that tells a whole story and was not written for Europe per se. They only picked out one verse that makes it seem as though it was written for the commission. But,” he added gamely, “even though it wasn’t, it seems kind of appropriate.”

I can’t say I’m fond of the song, but I rather like the video, a mournful piece of filmmaking that thoroughly undermines the lyrics’ cheery optimism. The day after Britain voted to close the door on the European Union, it has resonances that no one, pro- or anti-Europe, would have anticipated a quarter-century ago:

(For past installments of the Friday A/V Club, go here.)

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Nomura Warns “Do Not Underestimate The Global Contagion” From Brexit

In a nutshell, Nomura expects the global impact of the Brexit to be more through the financial, confidence and psychology channels than simply through trade. Their warning is to not underestimate the depth and reach of global financial market contagion, which seems to have increased since 2008…

To assess the global impact of this surprise result, it is important to look beyond the trade channel. Once the financial, confidence and psychology channels are taken into account our warning is to not underestimate the depth and reach of financial market contagion to Asia.

A globally coordinated central bank response to a global financial market meltdown is quite likely, such as liquidity support through FX swap arrangements and possible FX intervention, but with policy credibility at such a low it is unclear how successful these emergency measures would ultimately be when there is extreme market risk aversion.

Do not underestimate the global contagion

At first glance, it would seem that the financial and economic impact of this result should be largely confined to the UK, given that its economic size is quite small at less than 4% of world GDP and world imports in 2015. However, we believe that this is too simplistic of a view and that the impact of the Brexit will be far reaching and long lasting, for two main reasons.

First, we expect non-trivial spillover to the euro area economy and financial markets. While the value of merchandise exports from the rest of the EU to the UK is only 3% of the rest of the EU’s GDP1, the UK’s position as a global financial hub – UK financial sector assets account for more than 8x its GDP – leaves the rest of the EU much more exposed to the UK in terms of financial and investment linkages, in part reflecting the UK’s relatively liberalised domestic market and its strong legal framework and institutions.

For example:

  • One-third of the UK’s financial and insurance services exports are to the EU
  • More than half of the UK banking sector’s cross-border lending is directed to the EU
  • Almost half of the foreign direct investment received by the UK comes from the EU2

In addition, Brexit could further inflame anti-EU sentiment in other EU member states, heightening fears of more countries opting to leave the union. It is largely due to these non-trade-related channels that we expect a reduction in euro area GDP growth by 0.5 percentage points (pp) and a weaker EUR/USD.3 While UK share of global GDP is less than 4%, the rest of EU’s share is 18%, so once second-round effects on Europe are taken into account, the global impact is no longer trivial.

Extreme uncertainty is an anathema to financial markets

This extreme uncertainty in the City of London, one of the world’s largest financial centres, is anathema to global financial markets, especially when the global economy is as fragile as it is and as there are limited monetary and fiscal policy easing buffers available to most of the world’s major economies.

At this early stage, great uncertainty exists over just what the Brexit will ultimately mean for the UK economy. For example, how soon and how successful will the UK be able to negotiate with the EU the terms of its withdrawal, and renegotiate trade relationships with 60 non-EU economies where trade is currently governed by EU relationships? Will there be constitutional havoc in amending legislation from EU law to UK law? Will Scotland push for another referendum on independence? Heighted uncertainty and risk aversion is likely to discourage new investment in the UK and weigh on consumer sentiment. The danger is that all these factors – rising inflation, falling asset prices, high uncertainty and weakening private domestic demand – reinforce each other in a downward spiral, dwarfing any positive impetus from a more competitive exchange rate or monetary and fiscal policy easing.

The psychological impact – a link to the US elections

Moreover, one should not underestimate the psychological impact and how quickly markets could link the outcome to a rising risk of Donald Trump winning the US presidential election. As Anatole Kaletsky warned in an article on Project Syndicate (see Brexit’s impact on the world economy, 17 June 2016), the UK referendum is part of a global phenomenon – the rise of nationalist sentiment and populist revolts against established political parties. The demographic profile of Brexit supporters is found to be strikingly similar to that of American Trump supporters. The opinion polls are also strikingly similar: The UK polls showed the Brexit and Bremain camps to be close to neck and neck going into the referendum, as are the US polls on the two main US presidential candidates, Trump and Hilary Clinton. In contrast, investors, judging from recent price action, did not anticipate a Brexit, and option pricing suggests markets are also discounting a Trump victory. The UK betting markets too have downplayed the results of opinion polls: the odds of Brexit were generally about 1-in-3, similar to what US betting markets assign to a Trump victory.

The surprise Brexit result should now increase the credibility of opinion polls – they had indicated a much closer race than the odds published by bookmakers – in gauging how people actually vote. Statistical theory even allows us to quantify how expectations about the US presidential election should shift following the Brexit wins in Britain. To quote Kaletsky, imagine “for the sake of simplicity, that we start by giving equal credibility to opinion polls showing Brexit and Trump with almost 50% support and expert opinions, which gave them only a 25% chance. Now suppose that Brexit wins. A statistical formula called Bayes’ theorem then shows that belief in opinion polls would increase from 50% to 67%, while the credibility of expert opinion would fall from 50% to 33%.” The upshot is that investors are likely to take the results of opinion polls more seriously now and, as such, financial markets could start pricing in a greater risk of a Trump victory in the 8 November election and, possibly, a greater chance of populist insurgencies in the rest of Europe.

The financial tail wagging the real economy dog

In a nutshell, we expect the global impact of the Brexit to be more through the financial, confidence and psychology channels than simply through trade. Our warning is to not underestimate the depth and reach of global financial market contagion, which seems to have increased since 2008. For instance, during the European crisis of 2011, when there were significant fears of EU breakup, Asia’s stock and bond markets became much more highly correlated to the Euro Stoxx 50 and the German government bond yield than over 2000-07 (Figures 1 and 2). And as Hyun Song Shin, economic advisor and head of research at the BIS, recently described it (see Global liquidity and procyclicality, 8 June 2016), “the real economy appears to dance to the tune of global financial developments rather than the other way around”, through wealth, confidence, loan collateral and liquidity effects.

Granted, one potential cushion to a global financial market selloff is expectations of a further delay in the next Fed rate hike, but markets have already significantly priced out Fed hikes for this year (following the Brexit outcome, the market is now pricing a mere 6% likelihood of a Fed rate hike in 2016, down from 58% prior to the EU referendum).

Our US team now believes that the most likely timing of the next Fed rate hike is December (see Policy Watch: Brexit vote will likely delay FOMC rate hike, 24 June 2016). Instead, we believe that the more dominating factor will be renewed concerns over global growth and a likely stronger USD – together they are likely to cause oil prices to continue falling, adding more fuel to the fire of a major risk-off event in emerging markets. A globally coordinated central bank response to a global financial market meltdown is quite likely, such as liquidity support through FX swap arrangements and possible FX intervention, but with policy credibility at such a low it is unclear how successful these emergency measures will ultimately be when there is extreme market risk aversion.

Source: Nomura

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This Was Obvious in 2010 and Stated Explicitly Last March – The Euro, Stick a Fork In it, Its Just About Done!

So, Brexit. And… Czexit, Pexit, Frexit as EU referendum CONTAGION sweeps Europe amid political quake.

EUEXit gains steam1

EUEXit gains steam

 

Go to 5:38 and you will see I predicted this day exactly 3 months ago. The accuracy is uncanny…

I also called it in 2010 as well. Reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!, to wit:

What about the UK?

I’m glad you asked. We just finished our UK analysis (subscribers, see UK Public Finances March 2010 UK Public Finances March 2010 2010-03-24 09:32:01 617.23 Kb), and the Greek theme has continued into the land of the Brits.

  uk_economic_estimtes.pnguk_economic_estimtes.pnguk_economic_estimtes.png

… and in terms of government balance over-optimism???

uk_gaovernment_balance_projections.pnguk_gaovernment_balance_projections.pnguk_gaovernment_balance_projections.png

The UK government’s projections are based on real GDP growth of 1.3% and 3.5% in 2010-11 and 2011-12, respectively while the (extremely and unrealistically optimistic) consensus estimates stand at 1.2% and 2.1%, respectively. The latest estimates announced by the EIU (Economist intelligence unit) in March 2010 are even lower at 1.2% and 1.5% for 2010-11 and 2011-12, respectively. The European Commission has also raised similar concerns with the Commissioner for Economic and Monetary Affairs, Olli Rehn, criticizing governments after scrutinizing the strategies of 14 countries, including Germany, France, Italy, the U.K. and Spain, that “their budget projections were based on favorable macroeconomic assumptions after 2010 that may not materialize” (stated in a press article on March 18, 2010)
Raising concerns on the UK, the European Commission also stated that “The U.K. won’t meet the EU’s recommended target of reaching a 3% budget deficit by 2014-15, and projections for economic recovery may also fall short. Details on how the U.K. government, whose budget deficit is expected to hit 12.7% in the current financial year, will rein back its spending are also lacking. The absence of detailed departmental spending limits is a source of uncertainty”.

Continuously rising fiscal deficit has led to a continuous increase in the government total debt, which increased from 43.3% of GDP in 2007-08 to 72.9% in 2009-10. Moreover, according to EU Commission estimates, after Ireland, the UK is poised to incur the worst deterioration in the gross debt ratio in the EU, from 44.2% of GDP in 2008 to 88.2% of GDP in 2011. Though the average maturity of UK’s debt is considerably higher compared to other nations (thus no refinancing risk in the near future), the expanding interest burden is exacerbating the already strained fiscal deficit.

Moreover, rising debt not only restricts government’s fiscal stimulus and support to the economy, but is also forcing the government to undertake sharp fiscal consolidation measures to moderate the adverse impact of rising interest expenses on the fiscal deficit. This is bound to have an internal deflationary effect.

The government expects an increase in its debt from 55.5% of GDP in 2008-09 to 90.9% in 2012-13. In absolute terms, the government debt is expected to grow from £796.4 billion in 2009-10 to £1,486.2 billion in 2012-13. However, we expect the debt to increase much higher off higher primary deficit owing to relatively lower GDP growth assumptions.

And what about Italy???

Again, we’re glad you inquired. Subscribers should download Italy public finances projection Italy public finances projection2010-03-22 10:47:41 588.19 Kb as well as theFile Icon Italian Banking Macro-Fundamental Discussion Noteand the

File Icon Spanish Banking Macro Discussion Note in anticipation of our upcoming Spain analysis, which should be a doozy!

This is Italy’s presumption of economic growth used in their fiscal projections:

italian_real_gdp_growth.pngitalian_real_gdp_growth.pngitalian_real_gdp_growth.png

image006.pngimage006.pngimage006.png

image042.pngimage042.pngimage042.png

For those that don’t subscribe, there is still a lot of nitty gritty that I made publicly available on Italy here: Once You Catch a Few EU Countries “Stretching the Truth”, Why Should You Trust the Rest?

More on Euro stretching of the truth

If you haven’t had your fill of innuendo, ambiguity, creativity and sleight of hand (my polite way of saying “lying”), you can peruse Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!

For the complete Pan-European Sovereign Debt Crisis series, see:

  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one.

On a closing note….

BTC as GBP Brexit hedge

Contact me to learn more about Veritaseum’s unbreachable, blockchain-based smart contracts. reggie at veritaseum.com

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BAML Admits Wrongdoing, Agrees To Pay $415 Million For “Misusing Customer Cash To Generate Profits”

The SEC announced on Thursday that Bank of America's Merrill Lynch unit admitted wrongdoing and has agreed to pay $415 million to settle charges that it "misused customer cash to generate profits for the firm."

According to the statement, Merrill violated the SEC's Consumer Protection Rule by misusing customer cash that rightfully should have been deposited in a reserve account, freeing up billions to finance its own trading activities as a result.

An SEC investigation found that Merrill Lynch violated the SEC’s Customer Protection Rule by misusing customer cash that rightfully should have been deposited in a reserve account.  Merrill Lynch engaged in complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account.  The maneuver freed up billions of dollars per week from 2009 to 2012 that Merrill Lynch used to finance its own trading activitiesHad Merrill Lynch failed in the midst of these trades, the firm’s customers would have been exposed to a massive shortfall in the reserve account.

Furthermore, Merrill held up to $58 billion per day of customer securities in a clearing accounts that were subject to third party claims. Consumer protection Rules require that fully-paid for customer securities be held in lien-free accounts and shielded from claims by third parties.

According to the SEC’s order instituting a settled administrative proceeding, Merrill Lynch further violated the Customer Protection Rule by failing to adhere to requirements that fully-paid for customer securities be held in lien-free accounts and shielded from claims by third parties should a firm collapse.  From 2009 to 2015, Merrill Lynch held up to $58 billion per day of customer securities in a clearing account that was subject to a general lien by its clearing bank and held additional customer securities in accounts worldwide that similarly were subject to liens Had Merrill Lynch collapsed at any point, customers would have been exposed to significant risk and uncertainty of getting back their own securities.

You can read the full statement here.

* * *

While we're not surprised that this took place, we are actually shocked that the SEC finally had a bank admit to wrongdoing.

Perhaps if BAML would have used this guy as a consultant, they wouldn't be facing any charges at all:

 

 

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French Cops Claim They’re Too Tired To Keep Policing Massive Protests

Submitted by Michaela Whitton via TheAntiMedia.org,

Months of mass demonstrations and violence linked to the Euro 2016 football tournament have left French police begging for mercy. A heated combination of protests against controversial changes to France’s employment laws and outbreaks of violence by Russian and British football fans has taken its toll, leading a union leader to beg for a reprieve for French law enforcement.

Protests opposing Francois Hollande’s proposals to relax France’s labour code began in March and have been called the largest and longest-lasting since the French Revolution. While the government argues the changes are crucial to lower unemployment, protesters claim they are bad for workers’ rights. Countrywide protests have included strikes and blockades of oil refineries and hundreds of fuel depots. Workers also downed tools at the state-owned rail company.

On June 14, some masked protesters hurled paving slabs, smashed shop windows, and burned cars on the city streets. Despite relatively little mainstream media coverage of the mass protests, a series of violent images emerged showing police responding brutally with tear gas, batons, and water cannons. Around 60 people were arrested, and 29 police officers and 11 protesters were injured. Shortly after, workers’ unions and student organisations called for more street protests and strikes, on June 23 and June 28, to reject the new labour laws currently being debated in the Senate.

Earlier this week, France’s main police union, Alliance, pleaded with workers to postpone Thursday’s planned day of demonstrations to give the police time to recover.

“We’re asking for this demonstration to be postponed, along with any other static protests as our colleagues on all fronts are exhausted, worn out and tired,” Frederic Lagache, Alliance deputy secretary general said.

Describing the protests as repetitive and very violent, he said the police are too exhausted to cope with them — especially on top of dealing with terrorism and violence linked to the hosting of Euro 2016.

Despite the pleas for respite, the government gave the green light to the demonstrations — but only if they were confined to a small area of the city. At least 85 people were arrested in the capital as thousands took part in the largely peaceful protests. Union officials said 60,000 people attended the march, but police said the number was closer to 20,000.

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Homeless Survival and Property Rights Collide in Court Ruling

HomelessShould basic survival be permitted to trump property rights? And what are the implications for saying “yes”? We may find out in Massachusetts. The state’s Supreme Judicial Court has ruled that a homeless man can fight criminal trespassing charges by claiming it’s the only way for him to protect himself from the cold.

Note that this doesn’t necessarily mean the gentleman would be allowed to just barge in anywhere because of the chill or even that a jury or judge will buy the argument. The issue was that a judge denied the ability for the homeless man to use “necessity” as a defense to a jury. The Associated Press explains:

In a unanimous, 7-0 ruling, the court threw out six 2014 trespassing convictions. The court said the necessity defense allows a jury to weigh the plight of a homeless person against any harm caused by a trespass before determining criminal responsibility.

“Our law does not permit punishment of the homeless simply for being homeless,” Justice Geraldine Hines wrote for the court.

The court noted that its ruling was not an open invitation for homeless people to trespass.

“Allowing a defendant to defend his trespassing charges by claiming necessity will not, of course, condone all illegal trespass by homeless persons,” Hines wrote.

The owners of the properties had gotten orders to stop the guy from trespassing, so there’s a definite conflict here between the right of the homeless man to find refuge from extreme weather and the rights of the property owners to control who is and is not permitted in their spaces.

But we needn’t have to accept that this conflict is a natural consequence of having homeless among us. Let us not forget the many, many ways that municipalities make it hard for the poorest among us to solve their own problems. Let’s drive across country to Los Angeles, where homeless folks are probably not likely to have to suffer much from cold weather. But they have to deal with municipal regulations designed to keep them from a sleep solution that doesn’t violate anybody else’s property rights at all. Los Angeles wants to adopt a new ban on homeless people sleeping in their own vehicles in many public spaces.

Los Angeles actually already had a ban on sleeping in one’s vehicles (as do many California cities) but it was struck down in 2014. Judges ruled that the wording of the law was so unclear that it was being used by police to threaten people based on having food and personal property in their vehicles and even for sleeping in their cars on private property.

Los Angeles didn’t fight the decision and said they would craft a new, clearer ordinance. And now it’s back for consideration. From the Los Angeles Times:

At the city’s homelessness and poverty committee Wednesday, Councilman Mike Bonin proposed barring homeless people from “lodging” in vehicles parked by homes and schools, while allowing them to sleep in their cars and campers from 9 p.m. to 6 a.m. in commercial areas and in designated city, nonprofit agency and church lots.

Bonin said his proposal could forestall a more sweeping ban and avoid repeating what he called “absurd and pathetic” scenarios of the past, when police would ask people to get out of their cars to sleep on the sidewalks.

Homeless advocates said they doubt the city will come up with enough designated spaces to serve the city’s homeless (the number of cars and RVs that are being used for living space in Los Angeles is estimated at around 4,600). And given that violating the law is a misdemeanor violation, they fear it will be used by police to harass the poor (and take and destroy their property). Furthermore, Los Angeles makes it hard for homeless or extremely poor people to work their way out of their situation by keeping them from being street vendors. Oh, and don’t forget that incoming $15 minimum wage that will make it even harder for them to get jobs! Even giving them tiny houses to live in is not considered an acceptable solution.

Of course, property owners themselves contribute to this situation by encouraging cities to implement these ordinances because they don’t like the visual blight and the annoyances that come from the homeless. But the confluence of all these policies coming together this way simply makes homelessness even more miserable and difficult than it already is.

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Goldman Tells Clients To Start Buying Gold; Raises Price Target By $100

Dear gold bulls, we have some terrible news. Goldman has just raised its price target on gold.

Why is this bad news? Because with Goldman’s infamous track record of getting every trade recommendation wrong, it likely means that gold will be trading in the triple digits in no time. Recall that just four months ago we rejoiced when the same Goldman went short gold (when it was trading at $1205)…

 

… which facilitated gold’s prompt surge to over $1300, forcing Goldman to close out its short at a loss two months later.

As a result when we read just moments ago that the same Jeff Curries has now flip flopped, and is urging Goldman clients to buy gold…

… we are now certain that the next big move will be lower.

This is what Jefferies Currie, who made about 5 appearances on CNBC following his sell gold reco to bash the previous metal before finally getting stopped out at a 7% loss, said in a just released gold urging Goldman clients to start buying gold (we do wonder how many times this newly reborn “gold bull” will be invited to the Comcast subsidiary).

A stronger dollar and lower treasury yields in response to last night’s vote by Britain to leave the EU have driven gold prices higher and industrial commodity prices lower, bringing commodity markets back near levels where they were last week when ‘leave’ was favored in the polls. As the fundamental impact on industrial commodities of a leave vote is expected to be extremely small, this price action is consistent with our view of a stronger dollar putting downward pressure on commodities despite supportive fundamentals in some key markets like energy. In fact, prompt Brent time spreads have tightened modestly in this down move, emphasizing the macro nature of this sell off. Although the forward outlook is more uncertain under a ‘leave’ vote, much of the knee-jerk downside risks have likely been priced in relative to pre-vote expectations of a ‘leave’ outcome, i.e. a c.10% decline in the GBP. Even though much of the direct macro linkages have likely been priced in, second-round spillovers, i.e. other central bank reactions, could pose further downside risks. However, as the spillovers into the US rate markets and the flight-to-safety sentiment are likely to be more persistent, we are raising our gold price targets.

 

In gold, the sharp rise in prices has been entirely consistent with the move in US 10-year treasury yields, as the Fed Funds market has pushed a US rate hike now into 2018. While a leave vote creates upside in gold prices, we believe much of the upside should be in gold denominated in GBP and EUR given the more profound impact that the vote has on Europe. Nonetheless, the spillovers from Europe into the US rate markets does suggest a more sustainable impact on US rate markets as suggested by our rates strategists and accordingly, we are raising our gold price targets to $1300/toz, 1280/toz and $1250/toz on a 3/6/12 month basis from $1200/toz, $1180/toz and $1150/toz respectively. We also upgrade our year average forecasts to $1260/toz, $1261/toz and $1250/toz from $1202/toz, $1150/toz and $1150/toz for 2016/17/18 respectively. However, the ultimate trajectory will depend on the intensity and duration of the uncertainty shock created by the leave outcome and any potential revisions to the US growth outlook, both of which remain highly fluid in the current context.

In other words, “the ultimately trajectory” of the upcoming gold plunge will depend on how long Goldman seeks to offload its own gold to clients, before sending the metal crashing and starting from scratch.

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