It’s clear that risks in financial markets have taken a new turn for the worse and nearly three weeks after the shock Brexit vote on June 23, investors remain very nervous and lacking in confidence. That’s despite the recent rebound in share prices and the value of the pound – which vanished overnight.
In fact fears associated with the Brexit vote returned with a vengeance overnight, led by the 1% slide in the Aussie market yesterday, a resumption of the slide in the value of the pound to new 31 year lows (it fell under $US1.30 at one stage), new all time lows for Australian, German, French, UK and US Treasury 10-year bonds.
In London there was a sell off in the shares of UK property and funds manager groups after Standard Life froze redemptions from a $US3.9 billion commercial property fund on Monday and was joined by other managers overnight.
Big fund managers Aviva and M&G Investments (it’s fund is Britain’s largest of its type) joined Standard Life in freezing redemptions from their commercial property trusts – the three trusts cover more than 9 billion pounds (over $A15 billion) of assets.
Asian markets were weak, Europe sold off, (but London rose) and the gloom spread to Wall Street where the recent rebound was punctured well and truly.
Oil fell sharply under $US50 a barrel, down around 5% and New York, but gold and silver rose to their highest levels since March and August 2014 respectively.
The Dow fell 0.6%, as did the S&P 500, while Nasdaq fell 0.8% as US rates fell sharply. Our market is looking at a 20 point fall after overnight trading on the ASX 200 futures market.
More worrying was the warning from the Bank of England that the UK faced “challenging” financial conditions in the wake of the June 23 shock Brexit vote as the central bank moved to lower capital requirements for UK banks to enable them to keep providing credit to companies and consumers.
In its latest Financial Stability Report the central banks told UK banks to stop putting money away into additional capital buffers because they might need it to continue lending to business and consumers if conditions tightened.
The Bank of England said that UK banks should now be able to release 5.7 billion pounds from these buffers, enough to boost lending into the wider economy by 150 billion pounds or more than $A260 billion. The bank warned that the stability of the UK financial system faces multiple threats in the wake of the Brexit vote. The BOE said it has already detected signs in stock markets and commercial real-estate markets that foreign investors are pulling money out of the country.
The problems in those big open ended commercial property trusts of Standard Life, M&G and Aviva proof of timeliness of the Bank of England’s warning. In Italy shares in the stricken Banca Monte dei Paschi, slumped more than 19% (after a 14% slide on Monday) to just over 26 euro cents. That took the fall this year for Italy’s most indebted bank to more than 86%. The bank has been told by the European Central bank to come up with a plan by Friday to slash bad debts from around 47 billion euros to 32.6 billion by 2018.
The only way to do that is with a government capital injection, which is illegal undercurrent eurozone rules. The Italian government could very well precipitate a crisis by Friday by injecting capital into Monte dei Paschi, and offering help to other Italian banks with bad debt problems (all of them).
The new loans from UK banks will be needed judging by the selling wave that hit property companies and funds in the wake of the move by Standard LIfe, the big Scottish fund manager, to freeze redemptions from its commercial property fund.
That followed a steadily rising level of redemptions, made worse by the shock move late last week by Standard Life and several other big fund managers to cut the value of the commercial property holdings in their investment funds by around 5%.
Seeing the Standard Life fund had cash reserves of more than 300 million pounds (or half a billion dollars) in its books to handle redemptions, the rush to redeem their holdings by investors must have resembled a bank run in recent days.
Standard Life clearly froze the fund because it was running out of cash and has to sell property to raise more money, but doesn’t want to at fire sale prices, which could trigger more redemptions and a wave of selling in other funds, a development reminiscent of what happened in Britain in the GFC.
L&G and Aviva’s freezing of redemptions were for similar reasons.
Nevertheless more than 650 million pounds of commercial property deals have collapsed in the past few days, adding to the rapidly escalating fears about the stability of the sector.
Standard Life shares lost more than 5% in London overnight, RBS shares were down more than 8%, Prudential (which owns M&G) shares lost more than 4% and Deutsche Bank shares dipped 3.8% to a new all time low.
This is having an impact on UK banks (and wasn’t the NAB clever to spin off its UK banks earlier this year?) who are heavily exposed to commercial property, according to the Bank of England’s Financial Stability Report overnight.
The problems in the UK and the sell off of sterling saw the yield on US 10-year Treasury bonds, the global fixed income benchmark fall a record low of 1.38% overnight.
The Aussie 10 year dipped to a new low of 1.92% overnight and the dollar eased to just over 75 US cents as the market digested the latest comments from the Reserve Bank after it left the cash rate unchanged at 1.75%.
Australian shares fell yesterday as bank shares weakened – a forerunner of the later weakness overnight. The RBA decision leaving rates on hold had no impact and the ASX 200 Index and All Ordinaries Index closed down 1% at 5228 and 5312.8 points respectively.
