Global markets roiled as pound falls to record lows

SINGAPORE — Global financial markets went into a frenzy on Friday (June 24) as Britain voted to leave the European Union, with more than US$2 trillion (S$2.7 trillion) wiped off the value of stocks worldwide, while the pound fell to record lows.

The result of the vote caught investors by surprise. Markets had rallied on Thursday on hopes that a so-called Brexit would be avoided and bookies were giving the remain camp a high probability of success.

“It’s scary, and I’ve never seen anything like it,” said Mr James Butterfill, 41, head of research and investments at ETF Securities in London. “A lot of people were caught out, and many investors will lose a lot of money.”

The pound fell as much as 11 per cent against the dollar to touch US$1.3229, the weakest since 1985, on fears the decision could hit investment in the world’s fifth-largest economy, threaten London’s role as a global financial capital and usher in months of political uncertainty. It later recovered slightly to trade 8 per cent lower at US$1.3717. Oil prices tumbled, with New York crude oil retreating as much as 6.8 per cent to US$46.70 a barrel.

Against the Singapore dollar, the pound depreciated to a record low of US$1.8021, showed Bloomberg data. It was down 6.8 per cent at S$1.8554 late in Singapore. The pound is now down 10 per cent against the Singapore dollar this year. The euro was under pressure against most other currencies as investors worried Brexit could fuel anti-establishment movements in other European countries. The euro fell to US$1.0912, a low last seen in March, before recovering to US$1.11, still down 2.5 per cent on the day.

“The sterling pound is likely to remain under pressure for a longer period, as financial markets digest the reality of the Brexit result. As a corollary, GBP/SGD will also remain at record lows for the moment. If we see the GBP recover against the dollar, we can also expect it to recoup today’s losses against the SGD as well,” said Mr Bernard Aw, market strategist at IG.

In Europe, investors rushed to dump shares as soon as markets opened, following earlier drops in Asia. Britain’s FTSE 100 plunged about 8 per cent, with £124 billion wiped off the value of UK companies within 10 minutes, but recovered slightly for a 4 per cent loss by mid-day. The German index tanked 7 per cent and France’s index tumbled about 9 per cent.

Earlier in Asian markets, Japan’s Nikkei 225 closed down 8 per cent, its biggest fall since the global financial crisis in 2008. Hong Kong’s Hang Seng Index plunged 2.9 per cent, while the Shanghai Composite Index fell 1.3 per cent. Singapore ended down 2.1 per cent, its lowest close since May 13, as banking stocks took a hit. The index lost 1 per cent on the week. DBS Group Holdings fell 2.7 per cent, while United Overseas Bank shed 2.3 per cent.

“The STI was sold across the board, with financial counters performing the worst. We are likely to see the risk-off mood extend to next week or so as market participants fully digest the outcome as well as assess the implications for the global economy. To be sure, investors should brace themselves for more damage to risk markets, although we might not see the same ferocity that was evident in today’s session,” said Mr Aw.

Safe haven assets were highly sought after, which saw massive gains in gold. Gold soared as much as 8 per cent to its highest in more than two years as investors scurried for protection in the precious metal and other assets perceived as less risky.

S&P Global Ratings is preparing to remove the UK’s top credit grade and will give the country 24-hours’ notice, including one working day, to lower the rating “at least one notch” from AAA, Mr Moritz Kraemer, S&P’s global sovereign chief ratings officer, told Bloomberg Television. The decision will bring the S&P rating in line with its major peers. Fitch Ratings and Moody’s Investors Service reduced the UK to their second-highest levels in 2013.

The Bank of England pledged a huge financial backstop to calm plunging markets. Governor Mark Carney said it was offering to provide more than 250 billion pounds ($347 billion) plus “substantial” foreign currency liquidity and it was ready to take additional measures if needed.

Other central banks around the globe also intervened in markets. The European Central Bank said it was ready to provide euro and foreign currency liquidity if necessary.

“The next question traders will be asking is what will happen next week,” said IG’s Mr Aw. “Market participants will begin to speculate on similar referendums from dissatisfied EU members. According to a HSBC report, the countries who most viewed the EU negatively are Cyprus, Austria, Greece and Czech Republic. Growing perception that we could see unbridled contagion spreading throughout the EU will hit the European economies hard, as well as the euro and European equities. This means that risk off sentiments would likely dominate markets next week. Safe haven assets may continue to see strong demand.”

CIMB economist Song Seng Wun added: “Uncertainty is bad for business and investment decisions. It is still very early to speculate on the end result. What we can certainly tell are the pressures on the Sterling and Euro. The good thing is we have a weekend to see how events will unfold. Investors are seeking clarity. If there is uncertainty, they will run for the hill or switch to safe havens — demand is seen in the yen and gold.” WITH AGENCIES