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Friday, October 21, 2016

Markets and oil prices recovering from the shock of a British exit from the EU

After two trading session sharp fall due to Brexit world markets and oil prices began to recover. The ruble strengthened almost synchronously with the oil, although looks expensive. Why are the markets so quickly “let go” after the shock from wanting the UK to leave the EU and that is waiting on oil and the ruble?

On the eve of the mood in the global markets improved after falling two trading sessions, triggered by a Brexit. Yesterday world stock indexes gained 2-3%, while shares of individual banks grew by 5-10%, the S&P 500 index rose above the psychological mark of 2000 points, and quotations Brent played 3%, oil prices rose to 48.6 per barrel.

“The potential consequences of a British exit from the EU ceased to be a Central theme for market participants”

“Judging by the dynamics of the risky asset, the potential consequences of a British exit from the EU ceased to be a Central theme for market participants”, – said a senior strategist at VTB Capital” Maxim Korovin. In the end, the currencies of developing countries expected strengthened on average by 1.6%, including rose South African Rand, Brazilian real, Mexican peso and, of course, the ruble. The Russian currency has strengthened in tandem with oil prices.

The markets and oil the second day of the show the restoration. Oil prices are again approaching $ 50 per barrel. To 14.15 MSK environment Brent increased to 49.09 per barrel. Only the ruble in the morning went negative, though small. But the day of the Russian currency was trading steadily against foreign.

Per dollar give 64,10 of the ruble, change for the trading session zero. The Euro is worth 71,06 rubles, which is by 0.1% more. Official rates of the Central Bank of Russia for tomorrow, June 30, and lowered amount 64,25 ruble per U.S. currency and 71,21 rubles per European.

That reassured?

World markets found the strength to rebound after two days of sales thanks to the support of regulators. So, the Italian government announced plans to allocate € 40 billion to prop up banks, although, in comparison with the total size of toxic assets, a drop in the sea, says Roman Tkachuk from IR “Okay Broker. The Bank of England to stabilize the situation in the financial markets may reduce the basic interest rate and the European Central Bank to expand the volume of liquidity provision. Thus, the fed may decide to postpone the decision to lift the discount rate for the following year. “For the markets enough already that Central banks in case of shocks are ready to active actions”, – said Tkachuk.

Oil prices rose Wednesday, as investors again started to invest in commodity assets following the easing of fears associated with the decision of Britain to withdraw from the EU, as well as on a potential strike in Norway and a crisis in Venezuela, which can reduce supply, traders said, Reuters reports.

Probable strike of Norwegian oil workers threaten to reduce production of the largest manufacturer of the North sea, that is, reduce the supply of oil on the world market. In crisis-ridden Venezuela, oil producers and refineries can hardly keep the production due to power shortages and lack of equipment, which also pushes quotes up.

In addition, data from the American petroleum Institute (API) on Tuesday showed that reserves of oil in the U.S. last week fell by 3.9 million barrels. The reduction was expected, but not as significant.

That Wednesday morning, the ruble went into a small minus, due to the loss of support ended on the eve of the tax period, but this loss is largely offset by current positive dynamics of oil, said Reutеrs.

Why wait?

Standard Chartered announced that it expects the imminent return of oil prices to 50 dollars per barrel because the effects of the referendum demand was limited. However, Citi said that the associated Brexit “uncertainty and… the volatility is likely to continue for a long time.

Despite the turbulence of world markets in connection with the Brexit, the price of oil was much more stable than initially feared, says Vladimir rozhankovsky of IR “Okay Broker.

The problem of the impact of Brexit on the demand and the price of oil is greatly exaggerated, says Natalia Milchakova from Alpari. According to Goldman Sachs, GDP in the UK after leaving the EU this year will fall by 2%. The Bank of England considered that in this case oil consumption in the UK could be reduced by 1% or by 16 thousand barrels per day.

“This corresponds to a reduction in global demand for oil only 0,016%. Thus, the exit of Britain from the European Union will not have a significant impact on world oil demand and, consequently, the price of oil. In our opinion, the primary drivers of world oil demand this year are China and other Asian countries, but not Britain,” says Milchakova.

In her opinion, the British exit from the EU could slow down the incipient growth of the economy more in the EU than in the UK, and even then only at the expense of economically weaker countries in the Union. “Germany today shows the economic recovery at the same rate as the UK, and the growth of the economy of this country contributes the maximum share in the oil and gas consumption in the European Union. Risks for the EU economy can create a strengthening of the dollar against foreign currencies. However, the strengthening of the American currency though, and it might have short-term impact on reducing oil prices, but rather a purely psychological – like a more robust financial asset”, – says the expert.

However, the rate hike, the fed is likely to postpone the fall of the Euro and the British pound against the dollar. After all, it helps to European goods exports, but reduces the competitiveness of American counterparts. “Therefore, a significant strengthening of the dollar in the near future is an unlikely scenario. So, oil will soon return to the uptrend. Our forecast for the near future, the price of Brent is 48.5–50.5 USD per barrel”, – says Natalia Milchakova.

“The factor of the tax period is no longer relevant in the list of supports for the ruble, but remains the oil and the external background. A slight warming of relations with Turkey has managed to block news on the conservation of European sanctions against Russia. Everything remains in their places, and this is good for understanding the medium-term prospects,” says Anna Bodrova of Alpari.

However, she drew attention to one point, which could have a negative impact on the ruble. There is information about the recapitalization of a number of Russian banks. “This may be the first sign to indicate that the banking system is unable to cope with risks and is not working as required even in a narrow market. Any clarifying details from this side will be negative for the position of the ruble,” – says Bodrov.

In July, the dollar can rise for a couple of roubles for currency purchase at the expense of ruble dividends received, said Konstantin kostrub from the Bank ING Eurasia.

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