MPI takes 0.8% hit on EU referendum anxiety
June 24, 2016 - Weekly Pricing Pulse
Extreme volatility is possible over the next few weeks because of Britain's EU vote. For supply managers, it may be best to hold off on any purchases for now.
The IHS Materials Price Index (MPI) pulled back by 0.8% last week, continuing the sideways trend seen since April. Oil saw a heavy 4% decline that contributed most to the MPI’s decrease. Metal prices were also weak, with the ferrous and nonferrous metal subindexes declining 0.8% and 0.6%, respectively. Only chemicals and freight provided support.
A large chunk of last week's decline came down to one word: "Brexit." Financial, commodity, and foreign exchange markets pounced on a string of recent polls that suggested Britain was on course to leave the European Union. Early in the week oil dropped back down below $50/barrel while copper prices were also hit by growing concerns over the global impact. Over and above the direct fallout from a UK exit, much of the attention focused on systemic risks and how withdrawal may compromise Europe's financial, economic, and political cohesion. While financial markets dropped off sharply, with FTSE 100 losses approaching £100 billion by Thursday, UK and core Eurozone bond prices soared, as did gold prices, which broke briefly above $1,300/oz., their highest level since August 2014.
Some of the losses, however, have been offset by an ongoing relief rally following a pause in campaigning and recent polling suggesting momentum may be swinging back to the remain side. Nonetheless, there is potential for extreme market volatility this week in the lead-up to Thursday's referendum. An "out" vote would almost certainly produce a downside reaction that would also be compounded by sharp inflows into safe-haven assets and currencies.
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