Markets in a tailspin as Britain votes to leave EU

LONDON: Prime Minister David Cameron has resigned and global markets are in a tailspin. Here is politics and economics at play – at a scale that is unprecedented and unpredictable.

Global markets buckled as Britain’s vote to leave the European Union drove the British currency to the lowest in more than 30 years and European banks to their steepest losses on record.

“It’s scary, and I’ve never seen anything like it,” said 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.” And many will also profit from it.

A quick snapshot – US Treasuries surged in one of the most dramatic 24 hours in modern British history; European stocks followed Asian equities in the great tumble, with European stocks heading for the biggest drop since 2008 as trading soared. The yen strengthened past 100 per dollar for the first time since 2013, and gold rose the most in more than seven years.

“All hell is breaking loose,” said Vishnu Varathan, a senior economist in Singapore at Mizuho Bank Ltd. “The only surefire is you buy yen, you buy US Treasuries, you buy gold, and you sit tight.”

Gold surged to a two-year high, causing turmoil across markets and boosting haven demand.

Bullion jumped as much as 8.1%, the most since the height of the 2008 Global Financial Crisis, before paring some of the gain, and futures trading volume was seven times the average for this time of day.

As the pound tumbled against the dollar, gold priced in sterling rallied as much as 19% and gold mining companies such as Randgold Resources Ltd advanced.

European gold dealers saw a rush for physical metal. “There’s a lot of fragility out there politically and economically,” said Jordan Eliseo, chief economist at ABC Bullion. “It’s a more difficult time for investors and safehaven assets are the way to go.”

In the bond market, investors ran for the safety of top-rated German debt and ditched bonds in riskier southern Europe. German bond yields – an indication of government borrowing costs -- dropped to record lows while equivalents in the likes of Spain, Italy and Portugal shot to multi-month highs.

“Brexit is not just a UK issue. It is an issue for Europe and I think it is just the start of Europe having to figure out where the future lies,” Mizuho strategist Peter Chatwell said.

German yields across all maturities plumbed record lows, with the 10-year benchmark falling as low as minus 0.17% , on track for its biggest drop since the height of the euro zone crisis in August 2012.

Citi said in a note that, in the coming days and weeks, it also expected the Bank of England and other European central banks to cut rates, and the US Federal Reserve to delay its next hike to December 2016 or beyond.

Any perceived hit to near-zero inflation in the euro zone could certainly tip the ECB towards further easing.

A key measure of the bloc’s long-term inflation expectations – the five-year, fiveyear forward rate – slumped to a new record low of 1.34%, moving further away from the ECB’s target of close to 2%.

“On the European continent, we have to brace ourselves for serious ripple effects. The Brexit shock, the resulting uncertainty and likely market upheaval will also dampen growth in the euro zone for the remainder of this year,” said Holger Schmieding, chief economist at Berenberg Bank in London.

The Japanese yen, seen as a safe haven currency, strengthened as much as 7.2% to 99.02 per dollar. It advanced 17% against the greenback this year - after four consecutive years of decline - and is the best performer among developed nations.

It climbed against all 16 of its major peers. Investors and analysts said a move below 100 would put pressure on Japanese authori- ties to intervene to weaken the currency as its advance in 2016 threatens to unwind much of the impact of the Bank of Japan’s record monetary easing.

The central bank’s stimulus has been a key part of Prime Minister Shinzo Abe’s so-called three arrows aimed at reviving his nation’s economy after more than a decade of deflation.

Bloomberg View columnist Mohamed El-Erian called the exchange rate “a total nightmare” for BOJ policy makers, and is “too strong” for the world’s third-largest economy.

Commodities were not spared, swept up in a global market frenzy as investors sold assets linked to economic growth such as oil and copper and sought safety in precious metals.

Brent crude futures slumped as much as 6.6% and copper in London sank the most since Jan 7 as the US dollar surged. The Bloomberg Commodities Index of returns on 22 raw materials fell as much as 2.2%, the most since January.

“The flight to safety is very, very evident,” said Jeremy Wrathall, head of global natural resources in London at Investec Plc. “Copper is moving down, oil is moving down, it’s a reaction to the dollar. The only commodity that’s not behaving that way is gold.” - Agencies