SYDNEY/HONG KONG/TOKYO—Carnage came to global markets Friday in a sharp reaction to an historic referendum showing Britain had voted to leave the European Union (EU), sending the sterling to a record plunge and equities dropping globally.
Such a blow to global confidence could well prevent the Federal Reserve from raising interest rates as planned this year, and might even provoke a new round of emergency policy easing from all the major central banks.
Risk assets were scorched as investors fled to the traditional safe harbors of top-rated government debt, Japanese yen and gold.
Billions were wiped from share values as Financial Times Stock Exchange (FTSE) futures fell 7 percent, E-mini S&P 500 futures 5 percent and Japan’s Nikkei 7.6 percent. European stock markets were set to up 6 to 7.5 percent lower.
Biggest fall
The British pound collapsed no less than 18 US cents, easily the biggest fall in living memory, to hit its lowest since 1985. The euro in turn slid 3.1 percent to $1.1022 as investors feared for its very future.
The vote set the UK on an uncertain path and dealt the largest setback to European efforts to forge greater unity since World War II.
Sterling sank a staggering 10.1 percent to $1.3387, having carved out a range of $1.3228 to $1.5022. The fall was even larger than during the global financial crisis and the currency was moving two or three cents in the blink of an eye.
“It’s back to the future, we’re back to where we were in 1985,” said Nick Parsons, cohead of global currency strategy at National Australia Bank in London.
‘Existential crisis’
“We’ve had a 10-percent decline in six hours. That’s simply extraordinary, and a vote to leave provides an existential crisis for Europe.”
The shockwaves affected all asset classes and regions.
The safe-haven yen sprang higher to stand at 101.34 per dollar, having been as low as 106.81 at one stage. The dollar decline of 4 percent was the largest since 1998.
That prompted warnings from Japanese officials that excessive forex moves were undesirable. Indeed, traders were wary in case global central banks chose to step in to calm the volatility.
Market stability
Bank of Japan governor Haruhiko Kuroda said the bank was ready to provide liquidity if needed to ensure market stability and a source said Bank of England was in touch with other major central banks ahead of the market open there.
Other currencies across Asia also suffered on worries that alarmed investors could pull funds out of emerging markets, and central banks in the region were said to have intervened to calm jittery markets.
Bank of South Korea was thought to have sold dollars to curb the won’s drop, while the Reserve Bank of India appeared to have done the same to arrest the rupee from falling further.
In Tokyo, finance officials were closely monitoring developments and will respond when needed as were officials in the Philippines. The Australian dollar fell heavily against the dollar and the yen, while traditional stress markers such as interbank dollar funding rates in Singapore and Hong Kong were steady. However, treasury bill and government bond yields fell.
The yen’s strength due to its safe-haven status has been a frustration for Japanese authorities, who want a weaker currency to support exports and the economy. They have, however, been unable to garner support for intervention to weaken it from other major economies, most notably the United States.
Recession fears
The 100-yen-per-dollar level has been seen as a pivotal point to test the patience of Japan’s monetary officials on intervention.
Financial markets have been racked for months by worries about what Brexit, or a British exit from the European Union, would mean for Europe’s stability.
“Obviously, there will be a large spillover effects across all global economies if the ‘Leave’ vote wins. Not only will the UK go into recession, Europe will follow suit,” was the prediction of Matt Sherwood, head of investment strategy at fund manager Perpetual in Sydney.
Investors duly stampeded to sovereign bonds, with US 10-year Treasury futures jumping over 2 points in an extremely rare move for Asian hours. Yields on the cash note fell 24 basis points to 1.49 percent, the steepest one-day drop since 2009 and the lowest yield since 2012.
The rally did not extend to UK bonds, however, as ratings agency Standard and Poor’s has warned it would likely downgrade the country’s triple A rating if it left the European Union.
Yields on 10-year gilts were indicated up 20 basis points at around 1.57 percent, meaning higher borrowing costs for a UK government already struggling with a large budget deficit. The pound fell more than 10 percent to $1.3300, it’s cheapest level since September 1985, when five major economies agreed to weaken the dollar at the time.
Under pressure
“It is wild,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital in Sydney. “There is still a way to go yet, there is a lot of water to go under the bridge before Britain actually leaves the EU. We don’t know what sort of deal they are going to cut with the EU.”
The euro rose 8 percent to 82.86 pence, its highest level in two years.
Yet, it was under pressure against most currencies as investors fret Brexit could spark antiestablishment movements in other European countries, some of which have already seen decline in traditional political parties.
The referendum results also fanned worries that it could lead to further discontent among European integrations and rise toward nationalism or regionalism. Already, an election rerun is planned on Sunday after an inconclusive election December last year.
Oil prices also plunge
World oil prices plunged more than 6 percent in Asia Friday morning even before the Brexit vote concluded. The US benchmark West Texas Intermediate for delivery in August was down $3.11, or 6.21 percent, at $47.00 at about 0357 GMT. Brent crude for August was down $3.14, or 6.17 percent, at $47.77.
Prices remain volatile as global financial markets were on tenterhooks over the vote, which analysts say could have severe repercussions well beyond the UK.
Several world leaders have warned that Brexit could lead to a recession with global spillover effects.
Extreme volatility
“Now is the time of the extreme volatility … a vote for Brexit, could bring a big tail risk to the market,” said CMC Markets analyst Margaret Yang.
“That is exactly why banks and brokerage firms have been on the alert, anticipating the risks and impacts that Brexit could bring to the market,” she said.
Bernard Aw, an analyst with IG Markets in Singapore, said part of the reason for the plunge in oil prices was a strengthening of the dollar, which is seen as a safe haven in times of uncertainty.
A strong greenback makes dollar-priced oil more expensive for holders of other currencies, dampening demand and hurting prices.
“There’s a possibility that oil may fall more after the full results are out since we’ve already seen quite a plunge in the pound,” he said.