The pound slumped to a fresh 31-year low against the dollar yesterday while Asian equity markets tumbled as the negative effects of the Brexit vote 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 fears begin to kick in.
The pound sank to $1.2819 at one point, its lowest level since mid-1985, before edging back up.
Japan’s Nikkei stock index closed down 1.9% — having shed more than 3% at one point — while Hong Kong lost 1.2%. Seoul shed 1.9% and Sydney eased 0.6% but Shanghai bounced to end up 0.4%.
“Investor sentiment soured over the July 4 long weekend,” said Stephen Innes, senior trader at OANDA Asia Pacific, in a note.
“Just when you thought it was ‘safe to go back in the water’, the pound got pounded as speculation around Brexit forms into something more concrete.”
Hefty selling began in Europe on Tuesday afternoon when the head of the Bank of England said there was “evidence that some risks have begun to crystallise” following the shock June 23 vote for Britain to leave the European Union.
A biannual report from the bank’s Financial Policy Committee said the outlook for the country’s financial stability was “challenging”.
The BoE also relaxed commercial banks’ capital requirements to boost lending, which analysts said indicated it was prepared to further loosen monetary policy to support the British economy.
The measure provided support to London stocks, but was unable to prevent a sell-off across the rest of Europe and New York.
Adding to the sense of panic was news that three commercial property funds worth billions of dollars had suspended trade and blocked client redemptions. The moves come as fears grow that the vote will lead companies — particularly banks in London — to shift operations from Britain, fuelling a surge in selling and a slump in prices.
Europe’s financial sector is already under pressure after the European Central Bank warned Italy’s number-three lender Banca Monte dei Paschi di Siena, the world’s oldest bank, it had dangerously high levels of bad debt.
Mitsuo Shimizu, deputy general manager with Japan Asia Securities Group, told Bloomberg News there are “fears the global economy will worsen due to Europe.
“The UK’s economic outlook is blurred with uncertainty and the pound’s recent weakness is likely to encourage speculative buying in the yen.” The flight to safety saw the dollar fall towards ¥100 but pared the losses in the afternoon to 101.10.
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%.
Australia’s dollar also sank 0.9%.
And the yield on Japanese 20-year government bonds dipped below zero for the first time, while other maturities also fell to new lows.
The drop underscored that investors were willing to sacrifice earnings to keep their money in rock-solid government debt.
On oil markets, Brent and West Texas Intermediate rebounded from early losses to sit 0.4% higher in late trade, while gold, which is a go-to commodity in times of uncertainty, climbed 1.3% to $1,367.
In Tokyo, the Nikkei 225 down 1.9% at 15,378.99 points; Hong Kong — Hang Seng down 1.2% at 20,495.29 points and Shanghai — Composite up 0.4% at 3,017.29 points at the close yesterday.