The pound dived to fresh 31-year lows yesterday, bond yields were squeezed and equities hammered as the growing shadow of the Brexit vote over the global economy sent traders fleeing to safety.
With last week’s global rally — inspired by promises of central bank stimulus after the poll — consigned to history, high-risk assets such as emerging currencies and oil have also been sent tumbling as fresh fears kick in.
yesterday’s decline was “logical”, said Michael Jacoby, head equity trader at Oddo.“The market had recovered too strongly and too quickly.”
Safe-haven assets gold and silver reached two-year highs while yields on high-quality government bonds dropped further, and the yen and the Swiss franc rose.
The pound, however, sank to $1.2798 at one point, its lowest level since June 1985, before recovering somewhat to just above $1.29.
London’s FTSE 100 index was down 1.3% to 6,463.59 points at the close, while Frankfurt’s DAX 30 fell 1.7% to at 9,373.26 points and CAC 40 in Paris by 1.9% to at 4,085.30 points.
Shares in Banca Monte dei Paschi di Siena rebounded in Milan after two straight session of heavy losses on hopes that the Italian government will help find a solution to the bank’s debt problems.
Some analysts fear a bank crisis in Italy and eurozone turmoil are looming.
Shares in Telecom Italia plunged following an announcement that Italy could soon get a low-cost mobile operator.
Wall Street was modestly lower around the time of the European close as growth fears also gripped American markets and dealers eagerly awaited minutes from the June Fed meeting for clues on the path of interest rates.
Some analysts said the worst may not be over for the British currency.
“Even though investors should by now have priced into sterling slower growth, lower rates, renewed quantitative easing and prolonged political discord that does not mean they cannot mark it down further,” analysts at Moneycorp said.
Adding to the gloom was news that two more British commercial property funds had suspended trade and blocked client redemptions, taking the total this week to five.
With London’s role as financial hub fraying after the Brexit vote, Paris yesterday stepped in to welcome bankers, investors and businesses who may want to escape the uncertainty hanging over the City’s role by offering incentives.
Emerging market currencies floundered with South Korea’s won losing 0.8% against the dollar, while the Indonesian rupiah shed 0.2% and the Malaysian ringgit 0.7%.
In Europe, the yield on 10-year German government bonds pushed below -0.20% to strike a record low.