By Patrick Graham
LONDON, Jul 6 : Fear of instability in the European Union and of decades of global stagnation sent stock markets sharply lower on Wednesday as Britain’s pound sank below $1.30 for the first time in more than three decades.
After a steadier few days as investors digested the shock of Britain’s decision to leave the European Union, the implications of another round of financial losses, interest rate cuts and central bank money-printing to prop up growth have begun to set in.
Japanese and Korean markets led Asia lower, falling by 1.8 percent. Indexes in Frankfurt, London and Paris all sank by around 2 percent and the European banking index – a major focus of concern this year – by as much as 2.7 percent.
Wall Street was set to open at least half a percent lower.
Sovereign bond yields were lower across the board.
Government debt in Germany now returns less than nothing for the next 15 years, essentially suggesting that there will be no inflation or economic growth in that period.
In Switzerland, yields are at zero for the next half century.
“We’ve seen strong selling interest across the board this week,” said Michael Hewson, Chief Market Analyst at CMC Markets in London.
“While some have speculated that some ‘Leave’ voters may have undergone some form of buyer’s remorse, it would seem that the same could also be said of the investors who took part in last week’s stock market rebound.” The suspension of a handful of property funds, a reflection of concerns that Britain’s real estate market could sink in the face of a Brexit, has been the trigger for a new wave of selling of the pound and UK assets.
A huge, 7 percent of national output, current account gap, makes Britain and the pound highly vulnerable to any halt in the investment that has flooded into London property markets from Russian and Chinese investors in recent years.
Money markets are also now pricing in a good chance of a cut in one or more of the Bank of England’s official interest rates to zero within the next three months. Sterling fell as low as $1.2798 in Asian trading before recovering to $1.2986.
“The next catalyst for a sterling sell-off could come from the Bank of England next week,” wrote BNP Paribas strategists in a research note.
“The market is still likely under-pricing BoE easing, with our economists forecasting a 25 basis point rate cut next week followed by a 25 basis point cut at the August meeting and 100 billion pounds’ worth of quantitative easing, including corporate bonds, to be announced by the November meeting.” YUAN DOWN
The assumption of many in markets over the past week has been that promises of easier policy by central banks in the weeks ahead would support markets, but commodities prices are showing little sign of that optimism.
Having shed near 5 percent on Tuesday, Brent crude oil fell another 1.5 percent to $47.22, with U.S. crude at $46.01 a barrel. Copper prices fell 1.9 percent.
The bond market reaction is the clearest signal of how investors are now interpreting the economic hit from Brexit – yet another shock to a vulnerable global economy, another wave of central bank easing and possibly the starting gun for a new round of currency, tax and even trade wars.
China, which has been steadily weakening the yuan while eyes are fixed on Europe, allowed the value of its currency against the dollar to fall to another 5-1/2 year low overnight.
That helped Shanghai’s stock market remain in positive territory.
In Europe the big concern is how banks will cope with yet lower interest rates and writedowns in the value of assets they hold, as well as a new blow to growth that might cool borrowing and threaten more loan defaults.
Italy’s bank sector index has fallen 30 percent since Britain voted on June 23 to quit the European Union, bringing its losses so far this year to 57 percent. The euro zone banking stocks index has dropped 22 percent and 37 percent respectively.
“Italy faces a severe crisis that is exponential. This is not gradual and not linear,” said Francesco Galietti, head of the Policy Sonar risk consultancy and a former finance ministry official. “The immediate trigger is the banking crisis.”