Shares fell, bond prices rose as yields tumbled to new lows in Britain, the pound hit new 31 year lows and there’s more volatility on the way with the Aussie market and others in Asia facing a nasty slump at the opening of trading across the region this morning.
In Australia the ASX is looking at a 60 plus point slide this morning. At one stage the index was showing an 80 plus point fall on the futures market. That will be after yesterday’s half a per cent rise
And watch Tokyo were the futures market is showing a near 2% drop in the Nikkei at the opening after yesterday’s 2.4% rise.
The falls overnight in Europe and the US were not as great as they were last Friday, but they were a continuation of the fear-driven concerns among big global investors that the situation was not being controlled and there was no sign of any stablisation.
Fed chair, Janet Yellen called off a speech she was due to make in Portugal tomorrow night and is returning to the US – a sure sign of the growing concern she has at what is going on in Europe.
European Central Bank chair, Mario Draghi makes a speech tonight and that will be watched to see if he can again steady nerves in shaky markets as he has done twice over the past four years.
Conditions on global financial markets are fraught because of the rising uncertainty about what will happen to the EU and Britain and the longer this uncertainty persists, the greater the chance of it turning into something more substantial – such as a recession, or worse still, a financial crisis.
Debate and commentary by British and EU leaders overnight failed to make the situation any clearer, if anything it is cloudier with the EU allowing Britain time to start the leave process (despite France and Italy wanting no assistance to be given), but in London there’s no sign of who will start the process.
Britain lost its final AAA credit rating when Standard& Poor’s chopped it by two notices to AA and warned of more cuts to come.
And Fitch cut its rating from AA minus to AA and left the country’s outlook negative because of the uncertainty.
Meanwhile economists at Goldman Sachs and Bank America Merrill Lynch warned that the UK economy could very well slip into a mild recession over the next year that would also see a spike in unemployment and more pressures on the government’s finances as it negotiates its departure from the EU.
Sharemarkets were whacked, but not bashed like they were on Friday.
Wall Street lost heavily with the S&P 500 and the Dow ending at their lowest closes since March as investors sold on the mounting uncertainties following Britain’s Brexit vote.
The S&P 500 lost 37 points, or 1.8%, to finish at 2,000. The Dow tumbled 260 points, or 1.5%, to end at 17,140 and the Nasdaq Composite sank 114 points, or 2.4% to close at 4,594.
Gold rose – but by only $US6.80 an ounce to $US1,329 on Comex in New York. US oil futures lost 2% to around $US46.60 a barrel.
Our market is looking at a nasty 80 point slide at the opening as the offshore gloom hammered the overnight futures market, while the Aussie dollar traded around 73.48 – surprisingly solid given the strength of the US dollar and Yen in particular.
Watch for a lot of selling of local banks (and companies with exposure to Britain and the EU – see separate story). Banks across the EU and Britain were again hammered overnight with Barclays shares off 17% in London and Deutsche Bank shares down more than 5% as well.
Italian bank shares fell heavily at the opening, but steadied when the government let it be known it was looking to inject capital into some of them if it could get approval from the EU.
The Stoxx Europe 600 Index slid 4.1% afterFriday’s 7% rout. The Stoxx 600 Banks Index, which included European companies involved in banking, fell 7.6% after dropping 14% on Friday.
The MSCI Emerging Markets Index dropped 1.3% after a 3.5% drop on Friday.
Currency markets saw the pound take another fearful hammering – not as rough as on Friday, but it pushed the current down closer to $US1.31 to the dollar.
The yield on the UK 10 year bond finished at an all time low of 0.938% – a good indicator of the depth of concern among investors.
The yield on the US 10 year bond plunged to 1.45%,the lowest for four years. Yields on Japanese and German 10 year bonds fell deeper into negative territory.
In its statement announcing Britain’s ratings cut, S&P laid out the concerns the markets have now about the future of the UK.
S&P said that the surprise vote to exit the EU was a “seminal event, and will lead to a less predictable, stable, and effective policy framework in the UK”.
It warned that the move will herald a long period of uncertainty, and may lead to a “deterioration of the UK’s economic performance, including its large financial services sector, which is a major contributor to employment and public receipts”.
And making the situation worse is a lack of clarity over Britain’s ability to negotiate with the EU on a new trade deal: “…it is not clear if the EU — the destination of 44% of the UK’s exports — will permit the UK access to the EU’s common market on existing (tariff-free) terms, or impose tariffs on UK products,” S&P noted.
And that is why we have seen a sell off in bank and financial stocks with exposure to the UK and Europe – even in Australia with CYBG, Henderson, Wesfarmers and QBE in particular being sold off.
And on top of that all our big banks fund some (around 30% to just under 40%) of their balance sheets from borrowings made offshore.
Because the Brexit vote and uncertainty is hitting confidence in banks in Europe, banks everywhere will be impacted and if the crisis of confidence deepens some of our banks could find that funding becoming harder to get.
That is why anyone who says the problems won’t affect Australia is talking through their hat. If the crisis continues or worsens, then Australia will get caught up.
Britain is likely to enter a recession within the year as a result of last week’s vote to leave the European Union, a decision that will stunt global economic growth as well, Goldman Sachs’ top economists say.
"We now expect the (British) economy to enter a mild recession by early 2017," Goldman economist Jan Hatzius and Sven Jari Stehn wrote in a note for clients on Sunday.
They expect the victorious "leave" outcome in the June 23 referendum to chop a cumulative 2.75 per cent off UK gross domestic product in the next 18 months.
UK banks were the worst performers, with Royal Bank of Scotland Group Plc losing 23 per cent and Barclays Plc sliding 18 per cent. Losses in Italian lenders were limited after people with knowledge of the discussions said Italy is considering injecting capital into some banks.
The British pound fell to its weakest level since the mid-1980s on Monday as political turmoil heightened anxieties about the U.K.’s historic vote to leave the European Union, weighing on European currencies and stocks.
Sterling slumped to $1.3197 late Monday in New York, its weakest level since 1985, compared with $1.3684 late Friday in New York. The FTSE 100 fell 2.6% to 5,982.20.
Standard & Poor’s on Monday cut the UK’s rating by two notches, becoming the last of the three major credit rating agencies to strip the country of its top-notch status.
S&P reduced the rating from “AAA” to “AA”, and warned that more cuts could be on the horizon. The New York-based group said that the country’s surprise vote to exit the EU was a “seminal event, and will lead to a less predictable, stable, and effective policy framework in the UK”.
The group also warned that the move will herald a long period of uncertainty, and may lead to a “deterioration of the UK’s economic performance, including its large financial services sector, which is a major contributor to employment and public receipts”.
Making the situation worse is a lack of clarity over Britain’s ability to negotiate with the EU on a new trade deal: “…it is not clear if the EU — the destination of 44% of the UK’s exports — will permit the UK access to the EU’s common market on existing (tariff-free) terms, or impose tariffs on UK products,” S&P noted.
