After Friday’s falls and the $US2.1 trillion ($A2.7 trillion) loss in value in the wake of Britain’s vote to leave the European Union, markets will see a much more restrained trading pattern today and tonight as they assess the continuing fallout from the momentous decision that has called into question the future of the EU, the eurozone and the euro itself.
MSCI’s all-country world stock index fell 4.4% on Friday while the Stoxx 600 Index in Europe slumped more than 7% as investors sold off stocks in Britain, Germany, France, Italy and Spain – especially financials such as banks.
Traders will be watching currencies, especially sterling which suffered a record one-day plunge on Friday to a 31-year low, as well as gold which soared to a two-year high.
And as we saw on Friday, taking the brunt of the reaction today will be markets in Asia, led by Australia.
In fact the overnight futures market showed the ASX 200 will start with a small gain this morning of a couple of points – a big difference to the 3.3% plunge on Friday which saw the ASX 200 end at 5,113.
By the close of trading early Saturday morning the damage from the shock vote on financial markets was widespread and pretty savage.
Sterling (the British pound) was down 8.1%, the euro 2.4% and Eurozone shares 8.6%.
The London Stock Exchange was down more than 3%, while markets in Europe led by France and Germany all lost 6% or more in a day of massive selling.
Safe haven assets such as bonds, the $US, the Yen and gold all benefitted. The Aussie dollar soared past 76 US cents and then fell sharply to end the week around 74.60 and down just on 2% on the day – but it was up three quarters of a US cent over the week!
Analysts point out that if the uncertainty continues and the greenback rises, commodity prices will fall (watch gold be pressured by rising demand and the rising value of the US currency). And China could see a surge in capital flowing out of the country which could trigger new problems.
But there should be a note of caution about reading too much into the impact of Friday’s big falls – they were a reaction to the mule-headed optimism a day or two earlier that the ‘remain’ side would win the UK vote.
That saw shares and the pound rise and interest rates jump as riskier investing confidence returned to markets.
The ‘leave’ vote ended that and the big falls were as much a panicked reaction to that over-optimism as anything.
In fact there are sure to be some big losses among investors large and small from Friday’s shakeout, with talk of lots of losses among UK companies and financials because of the huge plunge in the pound.
While eurozone shares fell 8.6% on Friday they only fell 2.6% over the last week.
Over the week as a whole US shares lost 1.6%, Japanese shares lost 4.2%, Chinese shares fell 1.1% and Australian shares fell 1% (caused by Friday’s 3.3% loss).
As the AMP’s chief economist Dr Shane Oliver pointed out that was “bad but not monumental".
"Believe it or not the British share market actually rose 2% over the last week. While the British pound fell 8.1% on Friday it only fell 4.7% over the week as a whole and the $A actually rose 1% last week.
"It was similar with bonds and oil – big moves on Friday but only modest moves over the week,” he wrote at the weekend.
With Fed chair Janet Yellen due to speak at a conference in Portugal this week, there will be renewed interest in what she says given the ‘leave’ vote which has changed everything so far as the future path of US rates, not to mention the economies of Europe and the UK.
The vote was a big blow to investor confidence and the uncertainty the vote has sparked could keep the Federal Reserve from raising interest rates as planned this year, and even spark a new round of emergency policy easing from major central banks.
Spot gold rose over 4% and the yield on the benchmark 10-year US Treasury note fell to a low of 1.406%, last seen in 2012, but then bounced back to end at 1.56%.
The 10 year Australian yield fell under 2% for a second time in three weeks on Friday and ended at 2%.
Stocks tumbled in Europe. Frankfurt and Paris each fell 7% to 8%. Italian and Spanish markets posted their sharpest one-day drops ever, falling more than 12% led by a dive in European bank stocks.
Italy’s UniCredit fell 24% while Spain’s Banco Santander fell 20 (It is Europe’s biggest bank by assets).
In London UK bank stocks also plunged with Lloyds and Barclays down more than 20%, while RBS shares plunged 18% and the struggling Deutsche Bank lost 17% (and announced thousands of job losses in Germany).
And there were much smaller but still large losses for our banks here on Friday – the CBA lost 3.3%, the ANZ 4.1%, Westpac 4.4% and the NAB 3.8%.
Wall Street plunged Friday, posting largest drops in 10 months after the UK vote. The main indexes ended with weekly losses for a third straight week.
The S&P 500 plunged 75.92 points, or 3.6%, to 2,037.40, its largest one-day percentage decline since August of last year, when the Chinese market fell 6% in a matter of minutes. For the week, the index lost 1.6%, the largest one-week drop since February.
The Dow suffered its largest one-day drop in 10 months as well, plunging 611.21 points, or 3.4%, to 17,399.86. The blue-chip index lost 1.6% over the week.
And the Nasdaq was hit the hardest, as investors dumped technology and biotech stocks. The index lost 202.06 points, or 4.1%, to 4,707.98 and dropped 1.9% over the week.
