Pound slumps, banks tumble on Brexit fallout; bonds extend gains

BLOOMBERG

The aftershocks of the U.K.’s vote to leave the European Union reverberated across financial markets after a weekend of political turmoil, with the pound extending its record selloff and European equities dropping to levels last seen in February.
Sterling fell below Friday’s lows with a 3.7 percent slide to the weakest since 1985 and the FTSE 100 Index retreated alongside European shares, weighed down by upheaval within Britain’s two major political parties even before Brexit negotiations begin. Declines for British banks put a measure of European lenders on course for the biggest two-day drop on record. Demand for haven assets boosted gold and government bonds.
The victory for Brexit tore through world markets on Friday, pummeling the pound and high-yielding assets as more than $2.5 trillion was wiped from global equity values. PM David Cameron resigned without spelling out when the U.K. intends to leave the EU and at least 30 members of Labour Party leader Jeremy Corbyn’s team quit amid calls for his ouster, exacerbating the sense of instability.
“The range of outcomes for the U.K. economy is very wide, but clearly skewed to the downside at this point,” said Ned Rumpeltin, European head of currency strategy at Toronto Dominion Bank in London. “It is very hard to find a good scenario if things continue to progress toward a EU withdrawal.”
The next days and weeks will be key for central banks as they seek to limit volatility in financial markets. The European Central Bank is hosting a three-day meeting in Sintra, Portugal that will include speeches from its president, Mario Draghi, and Federal Reserve Chair Janet Yellen. German Chancellor Angela Merkel will host EU President Donald Tusk in Berlin on Monday to talk about the U.K.’s plan to exit the bloc. Cameron is due to address British lawmakers.

Currencies
The pound was the worst performing among major currencies, falling to $1.3176 as of 8:46 a.m. New York time after Friday’s 8.1 percent plunge. The euro weakened 1.2 percent versus the greenback, after sliding 2.4 percent in the last session, and the Norwegian krone fell 2.7 percent against the dollar.
While U.K. protesters angry at the result took to the streets during the weekend and circulated petitions calling for a fresh vote, the EU’s founding members bolstered pressure on the U.K. to leave the group as soon as possible. Cameron has said he is in no hurry to make the move, indicating he will wait as long as three months before making way for a new leader who will be responsible for negotiating the exit.
The yen strengthened 0.5 percent to 101.68 per dollar. It jumped 3.9 percent in the last session and reached 99.02, the strongest since 2013. Finance Minister Taro Aso told reporters on Monday that Prime Minister Shinzo Abe has asked for various measures to stabilize Japanese markets. The comments came after a meeting between officials including Aso, Abe and Bank of Japan Deputy Governor Hiroshi Nakaso.
The MSCI Emerging Market Currency Index fell 0.7 percent after dropping 1.3 percent on Friday. Currencies in eastern Europe led declines, with Poland’s zloty falling 1.7 percent against the dollar, the Hungarian Forint 1.5 percent and the Czech Koruna retreating 1.6 percent.
The People’s Bank of China lowered the reference rate for the yuan by 0.9 percent, the most since August, to 6.6375 per dollar after the greenback surged on Friday.

Stocks
The Stoxx Europe 600 Index slid 3.3 percent and the FTSE 100 lost 2 percent even as Chancellor of the Exchequer George Osborne sought to reassure financial markets by saying that a contingency plan is in place to shore up the U.K. economy. The volume of European shares changing hands today was almost three times the 30-day average.
The Stoxx 600 Banks Index, which included European companies involved in banking, fell 7.6 percent after dropping 14 percent on Friday. U.K. banks were the worst performers, with Royal Bank of Scotland Group Plc losing 23 percent and Barclays Plc sliding 18 percent. EasyJet Plc dragged travel-and-leisure companies lower, tumbling 21 percent after warning that a drop-off in travel demand arising from a Brexit will pare earnings over the rest of summer period.
Losses in Italian lenders were limited after people with knowledge of the discussions said Italy is considering injecting capital into some banks.
Futures on the S&P 500 fell 0.7 percent, indicating stocks may extend losses after plunging the most in 10 months on Friday, as investors weighed the implications of Brexit for economic growth and U.S. monetary policy. The odds of a Federal Reserve interest rate increase by February plunged to about 10 percent from 52 percent on Thursday. The probability of a rate cut before the December meeting rose to more than 18 percent.
Stock markets in Sweden and Finland, which were closed for the midsummer holiday on Friday, sank more than indexes elsewhere when trading resumed after the weekend. Sweden’s OMX Stockholm 30 Index dropped 6.9 percent, while the OMX Helsinki 25 Index fell 7.7 percent at one point on Monday. The MSCI Emerging Markets Index dropped 1 percent. The gauge slid 3.5 percent on Friday.
Shares in emerging Europe and Africa were among the hardest hit, with benchmarks in Poland and South Africa falling at least 1 percent. The Shanghai Composite Index gained 1.5 percent, after dropping 1.3 percent on Friday, as raw-material producers rose on expectations a campaign to reduce overcapacity will support prices.

Bonds
Treasuries gained, with 10-year yields extending Friday’s retreat by falling another nine basis points to 1.47 percent. The yield on similar-maturity German government bonds dropped six basis points to minus 0.11 percent and that on U.K. gilts declined below 1 percent for the first time on record.
“What we know is that there will be a lot of uncertainty, and uncertainty is not welcomed by the market,” supporting haven assets such as Treasuries, said Tomohisa Fujiki, chief rate strategist at BNP Paribas SA in Tokyo. “Our call for no rate hike this year or next is looking more and more likely.”
Spanish government bonds rallied on Monday after Acting Prime Minister Mariano Rajoy defied opinion polls to consolidate his position in a general election held Sunday. His People’s Party nonetheless fell short of a majority, requiring Rajoy to seek talks with competing parties in order to form a government. The yield on the nation’s 10-year debt dropped 17 basis points to 1.45 percent, after jumping 17 basis points on Friday.
Saudi Arabia appointed JPMorgan Chase & Co., HSBC Holdings Plc and Citigroup Inc. to arrange its first international bond sale, people with knowledge of the matter said.

Commodities
Gold gained 1.1 percent on demand for a haven, set for its highest close since July 2014.
West Texas Intermediate crude fell 1.9 percent. It plunged 4.9 percent on Friday, its biggest drop since February. Aluminum fell 1.2 percent on the London Metal Exchange. “Everything is caught up in Brexit,” said Evan Lucas, a market strategist at IG Ltd. in Melbourne. “The oil fundamentals for the moment will be put to one side as markets try to figure out exactly how this will all work.”