Brexit ghost haunts markets, pound sinks

British currency falls below $1.30; Wall Street recovers on health care, consumer stocks

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 growth have begun to set in.

Japanese and Korean markets led Asia lower, falling 1.8 per cent. Indexes in Frankfurt, London and Paris all sank by around two per cent and the European banking index — a major focus of concern this year — by as much as 2.7 per cent.

Wall Street opened lower but reversed course to trade higher, helped by health care and consumer stocks.

Sovereign bond yields were lower across the board. Government debt in Germany now returns less than nothing for the next 15 years, essentially suggesting 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, the 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, seven per cent 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 $1.28 in Asian trading before recovering to $1.3.  “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.”  The yuan was also down.

Having shed near five per cent on Tuesday, Brent crude oil fell another 1.5 per cent to $47.22, with US crude at $46.01 a barrel. Copper prices fell 1.9 per cent. 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.