‘INDEPENDENCE DAY’ DISASTER
Moody’s puts UK credit rating at risk Leading US bank shares down by £19 BILLION More falls feared in market mayhem
FINANCIAL markets face another stormy week after a top credit ratings agency cut its outlook on the UK to ‘negative’.
As Moody’s issued its warning on Friday, shares in the US closed down as shockwaves from Britain’s referendum vote – dubbed ‘Independence Day’ by Brexiteers – swept across the Atlantic.
America’s Dow Jones Industrial Average – its equivalent of the FTSE 100 index of leading companies – fell 3.4 per cent. But shares in leading banks fell more sharply.
Goldman Sachs dropped 7 per cent, Morgan Stanley fell 10 per cent, JP Morgan retreated by almost 7 per cent and Citigroup crashed 9.4 per cent, wiping $26 billion (£19 billion) off the combined value of the four global investment banks.
Traders dumped the US banks amid fears about their potential loss of access to the European single market from their respective London headquarters, as we report on Page 94.
In London, the FTSE 100 actually ended last week higher than the previous Friday.
Sharp falls among banking shares – many by almost 20 per cent – and housebuilders also down by between 20 and 30 per cent – were partly offset by gains from gold miners and other international companies regarded as safe havens.
The FTSE 250 – the index of the next biggest 250 companies on the London market – plunged 7 per cent on Friday, its biggest one-day fall in almost 30 years, but was down by just 2 per cent over the week.
The FTSE 250 is much more reflective of the UK economy as it is dominated by British-focused businesses.
A big faller in the FTSE 250 was Sir Richard Branson’s Virgin Money, down 25 per cent.
Branson owns 35 per cent of the bank and the fall knocked £140million off the value of his stake.
One trader who profited from the violent share price movement on Friday said he expected ‘more opportunities next week’.
Many believe the falls have been overdone. Yogi Dewan, founder and chief executive of Hassium, an asset manager for the super-rich, said: ‘I think the markets have overreacted quite a bit. The US falls made absolutely no sense whatsover.’
But while he said the real driver of share prices was company profits, Dewan, who previously worked at Goldman Sachs, admitted mood was playing a part.
‘Sentiment is quite negative at the moment. The market was just not prepared for the referendum result,’ he said, adding that he hoped shares would not suffer the wild swings of Friday when trading reopens tomorrow morning.
The pound fell 7 per cent against the dollar on Friday and most economists expect further falls in the weeks ahead. Many traders expect more sharp swings in share prices this week.
Monday’s opening will be the first opportunity for traders to react to Moody’s downgrade. It warned that it could take ‘years’ for the UK to disentangle itself from the EU, weakening its economic position.
Ratings agencies score governments and large companies on how likely they are to pay back their debt. Moody’s move from ‘stable’ to ‘nega- tive’ means it believes it is more likely to cut than raise the UK rating in the future.
At the moment it rates UK credit worthiness as Aa1 – one step down from the top AAA.
A rating affects how much it costs governments to borrow money in the international financial markets. A high score should mean a lower interest rate.
Moody’s said it ‘expects a negative impact on the economy unless the UK government manages to negotiate a trade deal that largely replicates its current access to the single market. However, at the moment there is substantial uncertainty over the type of trade agreement that could be achieved.
‘While we consider the UK’s institutional strength to be very high, the
challenges for policymakers and officials will be substantial.’
In a separate report it said it reaffirmed the EU’s AAA rating based on ‘the resilience of the credit standing of the EU’s remaining highlyrated member states’ and ‘the low probability that their commitment to the EU will diminish’.
Another top rating agency Standard & Poor’s, which rates the UK AAA, has already warned the top notch rating could be cut after the Brexit vote.
Meanwhile, Sir Roger Carr, chairman of defence giant BAE Systems and former president of the CBI, said big business needed to demonstrate its worth to the public. ‘Business needs to demonstrate that it is here for the benefit of all of us. It is the wealth creator and we must show that all of us benefit from business doing well and not just a few,’ he said.
‘The public did not believe the would-be experts, they did not believe they had sufficiently valid or persuasive arguments over all kinds of concerns, especially over immigration.’
Carr, along with the overwhelming majority of FTSE 100 bosses, had said staying in the EU would be far better for the UK economy.
He had warned that a Leave vote would have a knock-on effect in Scotland, where BAE Systems builds warships on the Clyde for the Royal Navy. He fears that a breakup of the UK is a step closer following the Brexit vote.
‘We cannot ignore what the SNP has said and it has always been the case that if Scotland was to separate, it would become a foreign country, and traditionally warships in this country have not been manufactured in foreign lands,’ he said.
But not all bosses regretted the referendum outcome.
Tim Martin, founder and chairman of pub chain Wetherspoons, who was in favour of Brexit, said this weekend: ‘I’m not feeling elated – my emotions feel quite flat actually. But I’m pleased, I think it’s the right thing that the country’s done. I think it’s voted for more democracy and I think that will translate into an improved economic performance, which is what people are worried about.
‘I’d been trading for ten years when there was a 27 per cent drop in the stock market in 1987 followed by an economic boom, so I’m quite relaxed about the immediate markets reaction. I’ve seen Armageddon before and this isn’t Armageddon.’
Even so, the pub group’s chief executive, John Hutson, sold 2,500 of his own shares in Wetherspoons two days before the vote for £18,325. (See Midas, page 96).
At first his sale looked like a loser as the shares jumped by almost 3 per cent on polling day, but they fell by 4.7 per cent on Friday.
A small saving for Hutson, but amid the market turmoil and the billions wiped off bank shares, it was small beer.
Additional reporting by Jon Rees and Sarah Bridge.