Week of June 27, 2016
- Last week Britons voted 52% to 48% to leave the European Union (EU).
- Only Scotland and the London area, the UK’s financial and trade center, voted to stay while all other areas voted overwhelmingly to leave.
- The main drivers for the “Leave” camp were working-class concern over open immigration from the continent and a perceived loss of British independence.
- Britain’s decision is of concern to the U.S. because the U.S.is the largest single investor in the UK and many U.S. companies use the UK as the English-speaking gateway to the 27 other nations that make up the EU.
- Britain will likely be forced to negotiate new trade deals with the EU that will involve duties and tariffs as well as other non-tariff barriers to trade.
- The loss of preferred trade status for the UK jeopardizes the value of U.S. investments there and forces U.S. companies to consider relocating their European operations to less-familiar ground elsewhere in the EU.
- Unwinding UK membership in the EU will be a multi-year process.
- The loss of the UK will increase the burden on Germany and other wealthy EU nations in coping with economic and social issues among poorer EU nations.
- Oil settled 5% lower on Friday after Britain’s vote to leave the EU.
- The decision spurred a rally in the US dollar, which is seen as a safe haven.
- A higher US dollar increases the cost of oil in other currencies, thus softening demand.
- Natural gas prices increased to $2.67–$2.70 per MMBtu, although gas inventories grew.
- The rising price is driven by higher temperatures in the U.S. and expectations of greater power usage to drive air conditioners.