FOCUS - Brexit would have little impact on LME metals, warehouse rules - Citi

print Print this document.  Post this story to Facebook.
Ewa Mantheyewa.manthey@fastmarkets.comCorrespondent+44 (0) 20 7337 2146

London 20/06/2016 - A potential 'leave' vote in the UK's EU referendum next week would have little impact on the operation of the London Metal Exchange (LME) as a functional market, Citi said.

The UK will vote in a hotly contested referendum on June 23 whether it should leave or remain in the EU. One of the key arguments from the 'Leave' campaign is that Britain is too tightly constrained by tough regulations agreed in Brussels.

One key advantage the LME has versus exchanges where other assets are traded is mainland Europe does not possess any sort of competing metals exchange on which to move or shift trading, the bank said on Monday.

On the physical side of the market, the bulk of the LME’s European warehousing space is located in mainland Europe and should remain so subject to the same governing laws as present.

"We expect some over-the-counter (OTC) counterparties that trade using LME pricing/fixes may well have to alter the nature of their legal entities from being London located to EU located, but this would have little impact in our view on the operation of the LME market itself," Citi said.

In terms of the referendum's influence on base metals pricing, the bank believes the principle impact will still be via investor risk appetite and sentiment on the one hand and the inverse US dollar/metal price relationship on the other.

A leave vote would prompt a reduction in investor risk appetite while the dollar would be likely to find additional support against sterling, the yen, emerging market currencies and possibly other European currencies, according to Citi, it said.

For copper, LME net money manager positioning fell to four month lows last week while the Comex fund length has been at the second shortest on record, suggesting Brexit risk along with wider China and other macro concerns are largely getting priced in, it noted.

For the week ending June 14, CFTC data show the money manager net short position for copper in Chicago grew a further 10,000 lots week-on-week to 47,000 lots, a new record.

For metals such as zinc and aluminium, where investor positioning remains net long, Citi believes modest dollar and risk-off related reversals are likely. For zinc, markets may retrace to $1,900 while aluminium could get back down to $1,500-1,550.

But the impact on base metals will be less significant in either direction compared with gold, the bank added.

The latest Brexit poll on Monday showed a slight turnaround in favour of the 'Remain' camp.

(Editing by Mark Shaw)



Fastmarkets.com
mailto:press@fastmarkets.com
8 Bouverie Street, London, EC4Y 8AX, UK
+44 (0)845 241 9949