Brexit uncertainty keeps shaking the world’s financial markets

A view inside the London Stock Exchange. Location: London – Stock Exchange / Reference: P-029216/00-01 / Date: 02/10/2015. © European Union , 2015 / Source: EC – Audiovisual Service / Photo: Jack Taylor

The Bank of England (BoE) published yesterday its Financial Stability Report warning about the risks that the UK economy is facing after the Brexit vote on June 23. The uncertainty that Britain undergoes both economically and politically is something that the BoE takes into great consideration and aims to provide immediate remedies.

While the sterling is hitting a 31-year low dropping to 1.3001 against the U.S. dollar and various shares experienced losses in yesterday’s session, the global government bonds become more favorable as safe haven assets are lowering their yields dramatically.

Moreover, the financial meltdown keeps expanding as major investment funds such as Standard Life Investments, Aviva Investors and M&G suspended their UK property real estate funds, exerting extra pressure on the British pound.

BoE warns and acts

Thus, the Bank of England (BoE) revealed its concerns through its Financial Policy Committee (FPC) which publishes a Financial Stability Report twice a year. Some of the EU referendum fears have already started to materialize. More specifically, “portfolio flows into UK equities and corporate debt have appeared to be slowed and sterling has experienced its largest two-day fall against the dollar since floating exchange rates were reintroduced almost half a century ago” Mark Carney, governor of BoE, stressed.

The BoE has already stepped forward and lowered bank capital requirements in order to provide extra liquidity to the UK market by lending an extra 150 billion pounds to businesses and households. The reduction of this capital buffer from 0.5% to 0% will stay put at least until June 2017, providing extra credit flexibility.

BoE’s next meeting, which takes place next week, is eagerly awaited since the upcoming measures will aim at reducing the Brexit uncertainty and reverse the economic downturn of the economy. Among those will surely be the cutting of the key interest rates which have been steady to 0,5% as well as the restart of quantitative easing.

Sterling and bond yields hit record lows

In the aftermath of the EU referendum, the plunge of the British pound against the euro and the dollar evolves rapidly. The exchange rate of gdp/usd reached 1,3036 yesterday tumbling by 12,37% compared to June 23. In addition, the sterling suffered losses of 11,04% against the euro in just 12 days time.

The government bond yields keep on declining since the surprising decision of the Britons to leave the European Union. Particularly, the US 10-year Treasury yield closed yesterday at 1,367% while the 10-year government bond yields of Germany and Switzerland fell far below zero. It seems that as uncertainty keeps on looming above the world markets, those yields will continue slumping because investors eventually lose their confidence and flee rapidly towards safer assets.

Stock markets fall as banking sector plunges

The world major stock markets experienced losses yesterday. The Wall Street stocks closed negatively with the S&P 500 losing 14.55 points and the Nasdaq Composite dropping by 0,82%. Furthermore, the European shares expressed by the FTSE EuroFirst 300 fell by 1,53% while MSCI which represents stocks in 45 countries worldwide dropped by 1,2%.

The banking sector is the one to have suffered the most though. Particularly the Italian banking shares have fallen by 57% YTD and by 30% since June 23. The latter creates serious issues in the EU which is most likely considering of taking immediate and precautionary measures to avoid any contagion of the non-performing loans to the rest EU member states. The outlook of the Italian economy is expected to get even worse if Matteo Renzi, the Italian Prime Minister, loses in the referendum on constitutional reforms next October, something that would inescapably lead to his resignation.

Will the central banks reverse the bad economic outlook?

All in all, Europe and the rest of the world have undeniably entered into unchartered waters since June 23 and the financial markets seem to respond nervously as investors have lost their confidence towards a successful divorce of the UK with the EU and global growth prospects. Further, the UK economy is threatened by short-term downturn in investments and commercial spending which pushes growth down to zero or even to negative territories. Britain will certainly need time to catch up, while at the same time there is no strong government in office.

However, the Bank of England and the European Central Bank are well aware of the fact that the Brexit vote will have severe impact on the UK and European economic growth. They are both expected to react in the coming months by providing more direct injections to the economy in an attempt to reverse the ominous outlook ahead.