Sterling, stocks in free fall as UK on brink of Brexit

By: | Published: June 24, 2016 10:16 AM

Carnage came to world markets on Friday as major television networks said Britain had voted to leave the European Union, threatening the existence of the entire bloc and its single currency.

Sterling stocksRisk assets were scorched as investors fled to the safety of top-rated government debt, with FTSE futures off 7 per cent and EMINI S&P 500 futures down 3.6 per cent. (Reuters)

Carnage came to world markets on Friday as major television networks said Britain had voted to leave the European Union, threatening the existence of the entire bloc and its single currency.

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, with FTSE futures off 7 percent and EMINI S&P 500 futures down 3.6 percent.

Also Read: Sterling dives, bonds rally as early Brexit results put Leave ahead

The British pound had collapsed no less than 15 U.S. cents, easily the biggest fall in living memory, to hit it lowest since 1985. The euro in turn slid 3.4 percent to $1.0997 as investors feared for its very future.

While vote counting had not been concluded, major British television networks including 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 $1.3525, having carved out a range of $1.3462 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 fell 9 percent while Standard Chartered sank almost 10 per cent.

The tremors shook all asset classes and regions.

The safe-haven yen sprang higher to stand at 101.52 per dollar, having been as low as 106.81 at one stage. The dollar decline of 4 percent was the largest since 1998.

That dragged the Nikkei down more than 8 percent and 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 slid almost 5 per cent, while Shanghai stocks lost 1.1 per cent.

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.

Early opinion polls had favoured the “Remain” camp and perhaps led to a false sense of complacency in markets. An Ipsos MORI poll put the lead at 8 points while a YouGov poll out just after polls closed found 52 percent of respondents said they voted to remain in the EU.

Sovereign bonds came back into favour as safe harbours against extreme market volatility, with US 10-year Treasury futures jumping 1.29 points.

Yields on the cash note fell 21 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, meaning higher borrowing costs for a government already struggling with a large budget deficit.

Across the Atlantic, investors were pricing in even less chance of another hike in US 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 US Bank in Portland, Oregon.

Fed funds futures were even toying with the chance that the next move would be a cut in US rates.

Commodities likewise swung lower as a Brexit would be seen as a major threat to global growth. US crude shed $2.02 to $48.09 a barrel in erratic trade while Brent fell $1.91 to $49.00.

Copper slipped but gold galloped more than 8 percent higher thanks to its perceived safe haven status.

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