Friday, June 24, 2016

‘Brexit’ Vote Wreaks Havoc in Markets
Stocks and pound tumble, while gold rallies after Britain votes to leave European Union

June 24, 2016 9:49 a.m. ET
Wall Street Journal

Britain’s surprise vote to leave the European Union battered the British pound by more than 11%, sent U.S., European and Japanese stocks tumbling, and broke records in government-bond yields.

The world’s financial markets braced for an uncertain future for the politics and economies of Europe. It was a historic drubbing for investors who had stacked up bets that the U.K. would choose to stay.

In the morning, British Prime Minister David Cameron vowed to step down; London’s FTSE 100 and the Stoxx Europe 600 both plummeted over 8% in the early minutes of trading.

The Dow Jones Industrial Average dropped 495 points, or 2.7%, to 17515 and the S&P 500 declined 2.5% in opening trade. The Nasdaq Composite tumbled 3.6%.

Friday’s U.S. stock-market open will test a series of rule overhauls designed to prevent a turbulent morning akin to the one last summer, where markets continually stopped and started over several hours as an unintended consequence of mechanisms to dampen volatility.

“Traders are choking on a fishbone this morning,” Alex Dryden, global market strategist at J.P. Morgan Asset Management, noting Friday may well see the biggest one-day move in the history of sterling.

The pound traded as low as $1.3230 in London’s early hours, as a pink-fringed dawn rose over the city and the British Broadcasting Corp. called the referendum for Leave. That was the lowest level against the dollar since 1985, and an epic move for a developed-market currency that had reached its highest level of the year just the day before. The pound later edged back up and was at $1.3671 in London afternoon trade. Hours before, it had peaked above $1.50.

“Although we may bounce from here, I think the direction of travel is quite clear,” said Marino Valensise, head of multi asset group at Baring Asset Management, adding Federal Reserve interest-rate increases are now “out of the question” for a long time.

The euro fell 2.4% against the dollar to $1.1048. Banks said they were putting all currency forecasts under revision.

The drop in sterling helped keep the FTSE 100 somewhat insulated from the turmoil in the U.K., last down 3.7%, given its heavy weighting to international companies and exporters. The FTSE 250 index, however, fell 8.6%, its worst day in at least 20 years.

The Stoxx Europe 600 was last down 6.8%, on pace for its worst day since the global financial crisis in 2008. Goldman Sachs sent out a note early Friday predicting the index’s losses related to Brexit could total 19%.

Europe’s fragile markets took a more severe lashing: Greece down 13.8%, Spain 12%, Italy 11%, its worst day in decades. So furious was the selling pressure in Italy that most Italian bank stocks simply didn’t open for trading: There were no buyers even at the deep-discount prices sellers offered.

“This could be a new Lehman moment,” said Saker Nusseibeh, chief executive at Hermès Investment Management, which has $33 billion in assets under management. “If other European countries start talking about referendums, all bets are off.”

Seeking safety, investors bought gold futures, which shot up to a more than two-year high and last traded up 5.6% at $1,334.10 an ounce.

The German bund yield fell to an all-time low of minus 0.169% and 10-year U.K. government bonds yielded just 1.008%, also a record. Ten-year U.S. Treasury yields fell as low as 1.419%, their lowest level since August 2012, and not far from their record low of 1.404% set in July of the same year. Yields move inversely to prices.

Spreads between yields on German government debt and those in Europe’s periphery widened sharply, particularly around Spain, Portugal, Italy and Greece, amid concerns Britain’s choice would exacerbate existing political tensions in the rest of the Continent.

“It calls up memories of the worst days of the European political crisis around Greece,” said Bo Christensen, chief analyst at Danske Invest. He expects a mild recession in the U.K. and Europe, and for European firms to slow hiring and investment amid the uncertainty, but notes the impact on the U.S. is likely to be limited in the long term.

Nothing was spared from the tumult. Brent, the international oil price, shed over 5.5% to $48.14 a barrel. European banks dropped over 14%, with shares in Barclays at one point down over 30%.

The vertiginous moves portend unruly trading ahead. Mr. Cameron’s planned departure throws the Conservative Party into a leadership race.

Stocks had gained steadily during the week, following a series of polls that suggested a victory for Remain. That enthusiasm continued through the day Thursday. By the time polls closed at 10 p.m. British time, gamblers had staked so many bets for Remain that betting exchange Betfair calculated a 94% chance that the side would carry the day.

On Thursday, the Stoxx Europe 600 climbed 1.5%, the FTSE 100 gained 1.2% and Germany’s DAX rose 1.8%. It was the fifth consecutive session of gains for all three indexes.

Then the counting of votes started. A hairbreadth win for Remain in Newcastle, in the northeast of England, started to deflate the pound, as did reports of Leave victories in smaller districts. Sunderland, a Labour-leaning port city where anger at the EU runs high, reported a 61.3% Leave tally. The pound slammed down, falling more than 3% in minutes.

In Tokyo, Yusuke Sakai, a senior trader at T&D Asset Management, got a shock geography lesson. “Wow!” he said. “What a big move. I don’t even know where this is? It must be a rural town or something. The currency is moving more than ¥2.” The Nikkei Stock Average closed nearly 8% lower as the yen gained over 2% against the dollar, hitting shares of the country’s exporters. It was the worst day for Japanese stocks since 2011.

Angus Nicholson, a market analyst at equities trader IG Markets in Melbourne, Australia, said a sense of high anxiety swept global markets as the pound plunged in the space of seconds, and it was evident in messaging coming across screens from the firm’s U.K. home office.

Mr. Nicholson said for a few moments “it was squeaky bum time” in his dealing room, as an earlier sense of reassurance around a win for the Remain camp was swept aside. “A 4% move within a second is pretty wild. In currency-market terms, it’s a black-swan event.”

Australia’s S&P ASX 200 stock index lost 3.2%.

By 3 a.m. in London, five hours after the polls had closed, Betfair put the odds of Britain’s remaining in the EU at 56%. A victory for Leave in Swansea, in South Wales, helped drive the pound still lower—down below $1.41, off more than 5% from just before the polls closed.

The day had started better for traders who had staked money on Remain. An online survey conducted on the day of the referendum by pollsters YouGov showed 52% support for the Remain camp, against 48% for Leave. The survey was released minutes after the polls shut.

The YouGov survey matched a number of other signals that Remain had the upper hand in the final stretch of a hard-fought, seesawing contest. Ben Page, chief executive of pollster Ipsos Mori, tweeted Thursday night that his company continued polling Wednesday and Thursday, suggesting 54% support for the pro-EU camp, against 46% for Leave.

Stocks in Japan suffered their worst day in five years and the British pound plummeted to its lowest level in around 30 years after the U.K. voted to leave the European Union. Photo: Reuters
Shortly after the polls closed, UK Independence Party leader Nigel Farage, who has spearheaded the Leave camp, said he expected the Remain camp to win, according to broadcaster Sky News. Mr. Farage later told the Press Association newswire that his estimate was based on “friends in the financial markets who have done some big polling.” But the early counting sharply shifted that sentiment, and with it many markets.

For some investors, the steep moves offer an opportunity to buy up assets that are expected to recover, particularly if central banks step in to cushion the blow.

“Now we have to decide whether to lighten the position on the U.K. if we think it will underperform further, or whether the opposite—whether it’s an all-time historical entry point,” said Philippe Berthelot, head of credit at Natixis Asset Management.

—Georgi Kantchev, Christopher Whittall, Jenny Strasburg, Bradley Hope, Kosaku Narioka, Chao Deng and James Glynn contributed to this article.

Write to Mike Bird at and Riva Gold at

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