Carnage came to world markets on Friday as major television networks said Britain had voted to leave the European Union, sending sterling on a record plunge and pummelling share markets around the globe.
Such a body blow to global confidence could well prevent the Federal Reserve from raising interest rates as planned this year, and might even provoke a new round of emergency policy easing from the major central banks.
Risk assets were scorched as investors fled to the safety of top-rated government debt and gold. Billions were wiped from share values as FTSE futures fell 7 percent (FFIc1), EMINI S&P 500 futures (ESc1) 4.4 percent and Japan’s Nikkei (N225) 7 percent.
The British pound had collapsed no less than 17 U.S. cents, easily the biggest fall in living memory, to hit its lowest since 1985. The euro in turn slid 3.4 percent to $1.0997 <eur=>as investors feared for its very future.
While vote counting had not been concluded, major British television networks including ITV(LON:ITV), the BBC and Sky News all called the result as a “Leave” and betting firm BetFair estimated the probability of leaving as high as 94 percent.
Sterling sank a staggering 9 percent to $1.3536 <gbp=>, having carved out a range of $1.3300 to $1.5022. The fall was even larger than during the global financial crisis and the currency was moving two or three cents in the blink of an eye.
“The carnage in the FX markets may continue if the leave votes pull further ahead in the lead,” said Bernard Aw, markets strategist at IG in Singapore.
“Equities markets will be affected, and we can see that Asian stocks are already under a fair bit of pressure. British banks listed in Hong Kong are suffering significant losses.”
HSBC (HK:0005) fell 9 percent while Standard Chartered (HK:2888) sank almost 10 percent.
The tremors shook all asset classes and regions.
The safe-haven yen sprang higher to stand at 101.34 per dollar <jpy=>, having been as low as 106.81 at one stage. The dollar decline of 4 percent was the largest since 1998.
That prompted warnings from Japanese officials that excessive forex moves were undesirable. Indeed, traders were wary in case global central banks chose to step in to calm the volatility.
Other currencies across Asia suffered badly on worries that alarmed investors could pull funds out of emerging markets.
MSCI’s broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) slid almost 5 percent, while Shanghai stocks <.SSEC> lost 1.1 percent.
FALSE HOPES?
Financial markets have been racked for months by worries about what Brexit, or a British exit from the European Union, would mean for Europe’s stability.
“Obviously, there will be a large spill over effects across all global economies if the “Leave” vote wins. Not only will the UK go into recession, Europe will follow suit,” was the gloomy prediction of Matt Sherwood, head of investment strategy at fund manager Perpetual in Sydney.
Investors stampeded to sovereign bonds, with U.S. 10-year Treasury futures (TYc1) jumping over 2 points in an extremely rare move for Asian hours.
Yields on the cash note (US10YT=RR) fell 24 basis points to 1.53 percent, the steepest one day drop since 2009.
The rally did not extend to UK bonds, however, as ratings agency Standard and Poor’s has warned it would likely downgrade the country’s triple A rating if it left the EU.
Yields on 10-year gilts were indicated up 20 basis points at around 1.57 percent <gb10yt=tweb>, meaning higher borrowing costs for a UK government already struggling with a large budget deficit.
Across the Atlantic, investors were pricing in even less chance of another hike in U.S. interest rates given the Federal Reserve had cited a British exit from the EU as one reason to be cautious on tightening.
“It adds weight to the camp that the Fed would be on hold. A July (hike) is definitely off the table,” Mike Baele, managing director with the private client reserve group at U.S. Bank in Portland, Oregon.
Fed funds futures <0#FF:> were even toying with the chance that the next move would be a cut in U.S. rates.
Commodities likewise swung lower as a Brexit would be seen as a major threat to global growth. U.S. crude (CLc1) shed $3.00 to $47.11 a barrel in erratic trade while Brent (LCOc1) fell 6 percent to $47.83.
Industrial metal copper sank 3 percent but gold <xau=>galloped more than 8 percent higher thanks to its perceived safe haven status.
Source: Reuters
