Carnage in markets on shock Brexit vote

Carnage in markets on shock Brexit vote
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Dow Jones

Stocks in the US suffered steep falls on Friday, closing slightly above the session lows, as the UK public voted to end the country’s membership in the European Union. Investors took fright at the unprecedented decision which could destabilize the region’s economy, slowing global growth and bring financial instability. Wall Street joined a global equity rout that saw even sharper falls in Europe, the move was made worse by the fact that global markets had rallied a day earlier on a bet that Britons would vote to remain within the European Union.

market analysis

The main US indexes all closed down more than 3%, wiping out year-to-date gains for both the S&P 500 and the Dow, while adding to the 2016 loss for the Nasdaq. The CBOE Market Volatility Index or VIX, which gauges the level of fear in the financial markets, soared 49% to 25.76, making for its largest one-day percentage gain since Aug. 8, 2011. The Federal Reserve said it was prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the US economy. In other assets classes gold which had surged more than $70, settled up $59.30 at $1,322.40, and yields on the benchmark 10-year US Treasury fell to 1.57% as investors moved to safety.

Oil prices dropped $2.47 to settle at $47.64 per barrel. Economic data was largely overlooked, market reaction to durable-goods orders was muted. Consumer sentiment sank to 93.5 in June, according to the University of Michigan. Companies that featured included banks which were the hardest hit with Citigroup Inc. down 9.3%, Morgan Stanley down 10% and Bank of America Corp. down 7.4%. Oil companies also suffered on the back of the fall in the price of oil with Chesapeake Energy Corp. down 5.8%, Transocean Ltd. down 6.3%. One climber was Newmont Mining Corp. which closed up 5.1%, following the jump in gold prices to the highest level in two years. The S&P 500 closed down 75.91 points at 2,037.41, following an earlier 81-point deficit. Nine of the 10 main sectors closed sharply lower. The Dow Jones closed down 610.32 points at 17,400.75, all 30 blue-chip stocks finishing lower, led by bank stocks. Earlier, the index was down by as many as 655 points. The Nasdaq Composite Index closed down 202.06 points or 4.12% at 4,707.98, for its worst one-day percentage drop since August 2011.

Europe

European markets suffered their steepest daily falls in almost eight years on Friday after the UK’s vote to leave the European Union sparked a bloodbath in European equity markets. The benchmark Stoxx Europe 600 index closed the session down 6.9%, its biggest losses since 2008, while Germany’s DAX closed off 6.8% and France’s CAC ended 7.9% weaker. Peripheral European markets posted the largest declines, with Italy’s FTSE MIB and Spain’s IBEX 35 both down 12%. The extent of the fall in markets was exacerbated by the shock result as the market had positioned for a remain victory following polls during the week indicating that was the way that the UK public was going to vote. The European Central Bank pledged to provide additional liquidity, if needed, in euro and foreign currencies.

The worry is that the U.K decision to leave the European Union could prompt other nations to be forced into holding referendums and also the destabilisation of trade in the region could lead to another recession. The Pound tumbled in early trade on Friday, dropping to its lowest level against the dollar since 1985, trading as low as $1.3229. By the time of the European close, sterling was trading at $1.3645. Oil prices settled lower, with West Texas Intermediate down 1.1% to $48.85 per barrel and Brent crude down 4.3% to $48.73.

Analysts had warned that a Brexit would hit European markets hard, as the event will spark uncertainty about growth prospects for the region and the network of trade, immigration, labour and other agreements between Britain and the other 27 members of EU. As in London banks suffered the most with the Stoxx 600 sub-index for the sector down more than 14%. Spain’s Banco Santander SA closed 20% lower, Germany’s Deutsche Bank dropped 14.1% and Commerzbank AG was down 13%. On regional markets the CAC closed down 359.17 points at 4,106.73, the DAX closed down 699.87 points at 9,557.16 and the IBEX closed down 1,097.60 points at 7,787.70.

FTSE

The FTSE closed significantly lower on Friday but well off the opening lows, stocks had initially fallen to seven-year low before slowly clawing over half the fall back after a historic UK referendum that put the country on course to exit the European Union. The FTSE 100 fell as much as 8.7% in early trade, but trimmed losses and settled down 3.2% at 6,138.6. Equities moved off the lows after the Bank of England Governor Mark Carney tried to reassure investors by saying the central bank has taken all necessary steps to prepare for a Brexit. Also helpng the partial recovery was the fall in the Pound which was helping many of the large companies as they derive a large portion of their revenues form abroad or report in dollars. The result also prompted the Prime Minister David Cameron to resign from his post. Following the referendum result, economists at HSBC cut their forecast for the rate of growth in UK gross domestic product in 2017 from 2.1% to 0.7%.

They also revised their projection for CPI inflation next year to 4.0% from 1.7%. The GBP/USD early Friday hit a 31-year low below $1.34 as it became clearer that the UK and EU were headed for a breakup. The Pound was at $1.3567 compared with $1.4871 late Thursday. The FTSE had been moving higher all week ahead of the referendum, as polls had indicated a narrow victory for the remain camp, despite the steep falls the FTSE still posted a 2% gain on the week. European markets suffered more than the UK on fears that the result in the UK could prompt more nations to question their EU memberships and also the region could be pushed back into a recession.

The German DAX was down by 6.82% or 699.87 points to 9,557.16 and the French CAC was down by 8.04% or 359.17 points at 4,106.73. The UK has had its credit rating outlook downgraded to “negative” by the ratings agency Moody’s after the country voted to leave the EU. Moody’s said the result would herald “a prolonged period of uncertainty”. FTSE 100 bank shares were hit the hardest, with Lloyds Banking Group PLC down 27%, Barclays PLC was down 24% and Royal Bank of Scotland Group PLC fell 25%. British banks with overseas operations have relied on pass-porting rules to easily access EU markets. Real-estate securities also suffered double-digit losses with British Land Company PLC down 26% and Land Securities Group PLC falling 22%. Randgold Resources Ltd. was one of few shares that finished higher, up 5.1% as prices for gold rose on a safety play. The midcap FTSE 250 was pushed down 7.2% to 16.088, with many companies on that index taking in more of their revenue from the UK economy than larger-cap firms. The FTSE ended the turbulent session down 199.41 points at 6,138.69 well off the lows seen just after the open of 5,788.74.

Economic News Round Up

US durable goods orders fell more than forecast last month, the Census Bureau reported that durable goods orders fell to -2.2%, from 3.3% in the previous month whose figure was revised down from 3.4%. Durable goods orders were forecast to fall -0.5% last month. Core durable goods orders fell to a seasonally adjusted -0.3%, from 0.5% in the previous month. Core durable goods orders were forecast to rise 0.2% last month. US University of Michigan consumer sentiment index fell more than forecast last month, the University of Michigan reported that consumer sentiment fell to a seasonally adjusted 93.5, from 94.3 in the previous month. The index on consumer sentiment was forecast to fall to 94.0 last month.

Germany’s Ifo business climate rose last month, the Ifo Institute for Economic Research reported that its index of German business climate rose to 108.7, from 107.8 in the previous month whose figure was revised up from 107.7. The index was forecast to fall to 107.5 last month.

The number of mortgages approved by the British Banker’s Association rose last month, the British Bankers’ Association reported that BAA mortgage approvals rose to a seasonally adjusted 42.2K, from 40.0K in the previous month whose figure was revised down from 40.1K. BAA mortgage approvals were forecast to fall to 37.9K last month.

Forex Round Up

The Dollar held onto gains against the other major currencies on Friday, after rallying to a three-month peak which was fuelled by the shock decision in the UK to leave the European Union in a historic referendum. The GBP/USD was down a huge 7.51% at $1.3762, after plunging to a 30-year low of $1.3231 earlier Friday. The EUR/GBP surged 5.50% to £0.8071, after hitting a more than two-year high of £0.8316. The Pound weakened across the board after the UK voted by a substantial margin to leave the EU in a landmark referendum, with the Leave side winning 52% of the vote, against 48% to remain.

Shortly after the Brexit news was announced, David Cameron said he will be standing down as UK Prime Minister before his Conservative Party’s conference in October. The Bank of England reacted to the vote on Friday by saying it would take all necessary steps to secure monetary and financial stability after the shock Brexit result. BoE Governor Mark Carney said the central bank would consider in the coming weeks whether to take additional policy responses but added that it has little room to ease. The European Central Bank also commented on the day’s events, saying it is ready to handle the impact of Brexit on markets and the banking system. At the open of US markets, the Federal Reserve also said it was “prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the US economy.”

Data showed that the German Ifo business climate index rose to 108.7 in June from 107.8 in May. Forecasts were for the index to hit 107.5 this month. The EUR/USD dropped 2.37% to $1.1113, off a four-month trough of $1.0913 hit overnight. The USD/JPY hit ¥99.03 overnight, the lowest since November 2013, before paring losses and settling at ¥102.37, last down 3.57%. The GBP/JPY was down 10.84% at ¥140.88, after hitting three-and-a-half year a low of ¥133.30 earlier in the day.

The USD/CHF was up 1.20% at Fr0.9697 after the Swiss National Bank confirmed it was intervening in the foreign exchange market to weaken the currency. The Australian and New Zealand dollars were both sharply lower with the AUD/USD down 1.75% at $0.7483 and the NZD/USD was down 1.41% at $0.7146. The USD/CAD was up 1.10% at CAD$1.2916. The commodity currencies were hit by a sharp drop in oil prices, also sparked by the Brexit vote. The US Dollar Index was up 2.29% at 95.47, after climbing to three-month high of 96.70 earlier Friday.

Commodity Round Up

Gold settled higher on Friday as investors looked for safety, but off the session highs, prices retreated from 27-month highs as leading central banks rushed to soothe global markets following a surprising decision by voters in the UK to cut ties with the European Union. Gold for August delivery settled at $1,319.75, up $56.55, at session-highs, the front month contract for Gold surged nearly $100 per ounce to $1,362.45, its highest level since March, 2014. Silver for July delivery jumped $0.402 to settle $17.765 per ounce.

Crude futures closed near one-month lows amid extreme volatility, as markets reacted to a surprising result of the UK referendum. After rallying slightly in the US morning session, crude settled near session-lows as selling pressure intensified in the final minutes before the close. WTI crude for August delivery fell $2.47 to settle at $47.64 per barrel. Brent crude for August delivery dropped $2.53 to settle at $48.38.

The Markets Overview

Following the shock decision of the UK referendum the GBP/USD initially dropped to levels not seen in over 30 years, it did however pare some losses but was still closed down a whopping 7.5% or at 6 year lows on the day. The outlook for the pair is still bearish with the possibility of the Bank of England reducing interest rates to as low as zero in the near future. However this extreme market situation could provide some great trading opportunities for those brave enough to try and pick the tops and bottoms of intra-day moves. Monitor the Pound for Binary Options trading.

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