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Despite Leaders’ Assurances, ‘Brexit’ Leaves Markets Nervous In American Markets, Panic Begins to Subside
(about 4 hours later)
LONDON — As investors continued to fret over Britain’s vote to leave the European Union, markets resumed their downward march on Monday, despite assurances from world leaders that they were prepared for the fallout of a so-called Brexit. The market panic that initially met Britain’s vote to leave the European Union showed signs of subsiding on Monday.
The pound fell to its lowest level against the dollar since 1985, to as low as $1.3152, following on from a sharp drop on Friday. British stocks were down 2.6 percent. While stocks continued to slide for a second trading day, by the close of business Monday a measure of calm appeared to be returning to certain significant corners of the market.
Wall Street followed the trend, with the Standard & Poor’s 500 index declining 36 points, or 1.8 percent, to 2,000. The Nasdaq composite gave up 113 points, or 2.4 percent, to 4,594. The benchmark Standard & Poor’s 500-stock index was stable for most of the day after dropping around 2 percent in the first minutes of trading. It ended the day down 1.8 percent. Markets in Japan and China finished Monday in positive territory.
The Dow Jones industrial average fell 260 points, or 1.5 percent, to 17,140. A gauge of expected future volatility in the markets, the so-called VIX, fell on Monday after spiking on Friday, and remained far below the level it reached last summer when problems in the Chinese economy came to the fore.
Seeking safer havens, investors piled into British government debt, pushing the yield on the country’s main 10-year bond to its lowest-ever level. The price of gold soared. “I’m not expecting contagion here,” said Jack A. Ablin, the chief investment officer at BMO Private Bank, based in Chicago. “We’re pretty well insulated,” he said of the American economy.
Asian markets were more sanguine, however, with Japan’s benchmark stock index ending the day up 2.4 percent. The outlook was less sanguine in Europe.
Global authorities are trying to soothe investors, saying they are ready to intervene should the predictions of economic and financial havoc by a British exit from the 28-member bloc play out. Investors continued dumping European stocks and seeking out the safety of gold and bonds on Monday, despite comments from British and European officials intended to calm markets.
George Osborne, the British chancellor of the Exchequer, and Prime Minister Shinzo Abe of Japan, have promised investors that they have the necessary resources and wherewithal to support their economies, while the United States Treasury secretary, Jacob J. Lew, called for world leaders to reassure markets. Last week, Britain’s central bank governor, Mark J. Carney, announced that he was prepared to unleash a further 250 billion pounds, or about $340 billion, to support lenders and the smooth functioning of markets. George Osborne, the British chancellor of the Exchequer, spoke for the first time since the so-called Brexit vote, before markets opened on Monday. He said that while Britain’s public finances would be affected by an exit from the bloc, the broader economy was still in good shape.
But investors remain skeptical. One worry is that further rounds of central bank activism could compound the problems in the markets. Some economists have expressed concern that artificially low interest rates, spurred by central bank moves, have helped distort markets and create asset bubbles — and done little to encourage wage increases or to lift growth. “Our economy is about as strong as it could be to confront the challenge our country now faces,” Mr. Osborne said. “It is inevitable, after Thursday’s vote, that Britain’s economy is going to have to adjust to the new situation we find ourselves in.”
“This is a historic moment, of the same magnitude as the fall of the Berlin Wall, and the full impact won’t be seen for years,” said Philippe Gijsels, chief strategy officer of BNP Paribas Fortis in Brussels. “The market is very, very nervous.”
The markets will probably be volatile for a while, as investors sort through the potential ramifications of Britain’s exit and the messy negotiations that are likely to follow.
Those worst hit on Monday were banks, which suffered from fears that Britain’s crucial financial sector could be badly affected by the country’s withdrawal. Trading in certain financial stocks such as Barclays and Royal Bank of Scotland were briefly suspended because of precipitous declines.
“Banks are one of the most exposed sectors to Brexit,” Andrew Coombs, a Citigroup analyst, said in a research note distributed early on Monday. He noted that British banks were particularly vulnerable “given the likely headwinds of a deteriorating domestic economy, and higher risk premia associated with a less predictable political and economic landscape.”
But, he warned, “the European investment banks are also not immune, with sizable operations in London, which may now need to be reviewed.”
For now, officials and policy makers will be hoping their words provide some measure of comfort.
Speaking before markets opened in Europe, Mr. Osborne said that while Britain’s public finances would be affected by an exit from the bloc, the broader economy was still in good shape.
“Our economy is about as strong as it could be to confront the challenge our country now faces,” he said. “It is inevitable, after Thursday’s vote, that Britain’s economy is going to have to adjust to the new situation we find ourselves in.”
“We were prepared for the unexpected,” he added. “We are equipped for whatever happens.”“We were prepared for the unexpected,” he added. “We are equipped for whatever happens.”
Mr. Osborne had campaigned fiercely for Britain to remain in the European Union, and he had warned that leaving the bloc would require an emergency budget involving spending cuts and tax increases. But on Monday, he said that any such moves would have to wait until Britain had a new leader; Prime Minister David Cameron has said he will step down by October. But Mr. Osborne’s comments appeared to do little to shore up the nation’s currency. The British pound fell on Monday to its lowest level against the dollar since the 1980s.
Mr. Osborne added that he had spoken to his European and Group of 7 counterparts, as well as to other senior officials, including Mr. Carney, the governor of the Bank of England; the head of the International Monetary Fund; and the chief executives of major British companies. “We have further well-thought-through contingency plans if they are needed,” Mr. Osborne added. In another blow to the British economy, the Standard & Poor’s rating agency announced on Monday that it was stripping Great Britain of its AAA rating. The country’s rating was dropped two notches, to AA.
Later on Monday, Mr. Lew warned that there would be “economic headwinds,” and he called on world leaders to reassure their countries and the markets. Standard & Poor’s analysts said in their report that the vote last week “will weaken the predictability, stability, and effectiveness of policy making in the U.K. and affect its economy, G.D.P. growth and fiscal and external balances.”
“The challenge is for leaders in the U.K., in Europe, around the world, to manage through a time of change,” he said in an interview with CNBC, “to provide as much continuity, stability and the foundation for strong economic growth as possible.” There is still enormous uncertainty about how exactly Britain’s exit will play out, and how it will ripple through the economy. The most obvious victims are likely to be the big European banks, which have relied on an ability to operate easily across borders.
Before trading opened in Japan, Mr. Abe held an emergency meeting with officials from the central bank and from the Finance Ministry to discuss how to contain the fallout from the vote in Britain, which pummeled markets in Japan and elsewhere on Friday. Japan was hit especially hard, with the Nikkei suffering its biggest one-day point drop in 16 years and the yen jumping about 5 percent against the dollar. Trading in financial stocks like Barclays and Royal Bank of Scotland was briefly suspended on Monday because of precipitous declines.
On Monday, the Japanese authorities issued their strongest warning yet that they were prepared to intervene in the market to curb the rise of the yen. Markets elsewhere in the region were mostly little changed. Japan, however, generally fears an excessively strong currency, which can hurt the country’s economy by making its exports more expensive and consequently less competitive. Barclays fell 17 percent on Monday on top of its 17 percent decline on Friday. That brought the bank’s stock below the bottom it reached during the 2011 eurozone crisis, though it remained far above the trough reached during the financial crisis.
“There is still uncertainty and risk in the financial markets, and it’s important that we continue to work for stability,” Mr. Abe told reporters after a meeting at the prime minister’s office. He added that he had instructed the finance minister, Taro Aso, to “coordinate with the Bank of Japan and be even more mindful of movements in the markets, including the currency market.” “Banks are one of the most exposed sectors to Brexit,” Andrew Coombs, a Citigroup analyst, said in a research note distributed on Monday.
He noted that British banks were particularly vulnerable “given the likely headwinds of a deteriorating domestic economy, and higher risk premia associated with a less predictable political and economic landscape.”
But, he warned, “the European investment banks are also not immune, with sizable operations in London, which may now need to be reviewed.”
Italian officials said on Monday that they were looking at creating what amounted to a bailout fund to help struggling banks in the country.
Throughout Europe, however, investors have not been assuming the worst — they seem to have reserved their harshest punishment so far for bank stocks. By contrast, a broad index of European shares, the Euro Stoxx, fell 2.8 percent on Monday but was still above the lows it reached earlier this year.
In the United States, the S.&P. 500-stock index finished down 1.8 percent, or 36.87 points, at 2,000.54 on Monday. The Dow Jones industrial average fell 1.5 percent, or 260.51 points, to 17,140.24. The Nasdaq composite was down 2.4 percent, or 113.54 points, to 4,594.44.
Some economists said that the turmoil in Europe could slightly stunt American growth. Goldman Sachs economists said on Monday that they had reduced their estimates for American economic growth in the second half of 2016, to 2 percent from 2.25 percent.
But other analysts were far more optimistic. Pantheon Macroeconomics said on Monday that it still anticipated American economic growth to gain steam this year, driven by improving consumer confidence.
For American investors, the biggest fallout from the British vote may be the influence that it has on the Federal Reserve and its plans for raising interest rates in the economy.
Traders were betting on Monday that the Fed would have to keep rates lower for longer, which could help stimulate the economy. Janet L. Yellen, the Fed chairwoman, was supposed to attend a meeting of central bank chiefs this week in Portugal, but she called that off after the British vote last week.
In Japan, Prime Minister Shinzo Abe held an emergency meeting on Monday with officials from the nation’s central bank and Finance Ministry to discuss how to contain the fallout from the vote in Britain, which pummeled markets in Japan and elsewhere on Friday.
Japan was hit especially hard. The Nikkei suffered its biggest one-day point drop in 16 years and the yen jumped about 5 percent against the dollar.
On Monday, Japanese authorities issued their strongest warning yet that they were prepared to intervene in the market to curb the rise of the yen. Markets elsewhere in the region were mostly little changed. Japan, however, generally fears an excessively strong currency, which can hurt the country’s economy by making its exports more expensive and consequently less competitive.
“There is still uncertainty and risk in the financial markets, and it’s important that we continue to work for stability,” Mr. Abe told reporters after a meeting at the prime minister’s office.
He added that he had instructed the finance minister, Taro Aso, to “coordinate with the Bank of Japan and be even more mindful of movements in the markets, including the currency market.”