WTI/USD – US Crude Slides as Brexit Worries Unnerve Markets

US Crude has posted sharp losses on Tuesday, as WTI/USD is down 3.9 percent. The pair is trading at $46.78 in the North American session. Brent Crude has also dropped and is trading at $47.95, as Brent trades at a premium of $1.17. On the release front, there are no major US events on the schedule. Factory Orders declined 1.0%, the first decline in three months. As well, IBD/TIPP Economic Optimism dropped to 45.5 points, short of the forecast of 49.3 points. This reading points to ongoing pessimism among US consumers. On Wednesday, the Federal Reserve will release the minutes of its June policy meeting.

The Brexit vote to leave the European Union has had global ramifications, wiping out a staggering $3 trillion from global stock markets. Jittery investors are flocking to safe-haven assets like gold and the Japanese yen, at the expense of assets which carry more risk, such as oil. The British pound, which has shed about 11 percent since the vote, posted sharp losses on Tuesday and is trading at 31-year lows. British politicians have sought to calm the public and the markets, but the pound’s free-fall underscores that the situation is anything but normal. The country’s political picture is in flux, as the Conservatives are choosing a new leader to replace Prime Minister Cameron and elections may follow later in the year. On the financial front, the pound has taken a beating and London’s position as a world financial center could be in jeopardy. Last week, the normally even-keel BoE Governor Mark Carney was surprisingly blunt, stating that the BoE planned to lower interest rates during the summer, and this will only add pressure on the battered UK financial sector.

Britain may have voted “Out”, but there is no timetable as to when the exit will take place or what type of trade agreement will define the new economic relationship between the EU and Britain. British leaders are in no rush to leave, but European leaders have called on Britain to exit as soon as possible in order to minimize the uncertainty and instability caused by the Brexit vote. When it comes to the EU, Britain finds itself in limbo (“neither in nor out”), and the political and economic instability unleashed by Brexit could continue to weigh on the currency and commodity markets for the foreseeable future.

Market focus on whether the Federal Reserve would raise rates has understandably shifted to the back-burner since the Brexit vote in late June. The historic referendum has had economic repercussions across the globe, including the US. What will be the effect of Brexit on US monetary policy? It may be too early too tell, but some analysts have said that the Fed might change stance and actually lower rates this year. The markets will be keenly interested in the Fed minutes, which will be released on Wednesday, although they will have preceded the Brexit vote. Fed Chair Janet Yellen and her colleagues have sounded cautious about the US economy, and the financial instability caused by Brexit could delay any rate hikes until 2017. The US economy is in good shape, but the Fed hasn’t raised rates since last December and is unlikely to seriously consider any rate hikes unless employment and inflation numbers point upwards.

WTI/USD Fundamentals

Tuesday (July 5)

• 10:00 US Factory Orders. Estimate -0.8%. Actual -1.0%
• 10:00 US IBD/TIPP Economic Optimism. Estimate 49.3. Actual 45.5 
• 14:30 US FOMC Member William Dudley Speaks

Upcoming Key Events

Wednesday (July 6)

• 10:00 US ISM Non-Manufacturing PMI. Estimate 53.3
• 14:00 US FOMC Meeting Minutes

*Key events are in bold

*All release times are EDT

WTI/USD for Tuesday, July 5, 2016

WTI/USD July 5 at 10:50 EDT

Open: 48.66 Low: 46.72 High: 48.66 Close: 47.78

WTI/USD Technical

• WTI/USD was flat in the Asian session. The pair posted slight losses in the European session and is steady in North American trade
• 46.49 is providing support
• 50.13 remains a weak resistance line

Further levels in both directions:

• Below: 46.49, 43.45, 39.32 and 35.25
• Above: 50.13, 53.50 and 56.79

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