Research

May’s resignation, and possible replacement by Boris Johnson, does show that the risk of a no-deal Brexit is rising with betting markets having raised their up from roughly 10-15% to 20-25% in recent weeks. We reiterate that the economic damage of a no-deal Brexit would be substantial.

President Trump’s decision to raise tariffs from 10% to 25% on $200 billion of Chinese imports, and the resulting Chinese retaliation, is likely to have only modest impacts on energy commodities and precious metals. The bigger story for these sectors is declining growth expectations that are only partially due to trade tensions. Trade tensions are, however, likely to be a major driver for industrial metals over the near-term.

Since early 2010, the broad trade-weighted U.S. dollar index and 5-year (nominal) combine to explain 71% of inflation-adjusted daily gold price movements. Replacing nominal yields with TIPs raises this figure to 79%. Furthermore, a 100 bps increase in TIPs yields correlates with a whopping 20.5% reduction in gold prices.

Commodities, including precious metals, do not have a stable price that they eventually return to in the long-term. There may, however, be stable long-term connections between different commodities, which help provide insight on whether any are mispriced.

Because supply disruptions may be related to geopolitical risk, we decided to see how political and economic uncertainty affect a forecasting model for crude oil. We consider both U.S. economic policy uncertainty, and Caldara and Iacoviellos’ (2017) measures of geopolitical uncertainty for the world, Saudi Arabia, and China.