Hong Kong/Sydney: Risk aversion held sway in financial markets amid signs the UK and European economies are taking a turn for the worse. Asian and European equities dropped with US stock index futures and the pound, while haven demand boosted the yen, gold and sovereign bonds.
The MSCI All Country World Index lost ground for a second day and sterling slumped to its lowest in more than three decades after Bank of England chief Mark Carney said on Tuesday that risks from the UK’s vote to leave the European Union had started to crystallize. The yen climbed to its strongest level since 24 June, when the results of the British referendum first roiled global markets. US and German bond yields plumbed new lows as Japan’s 20-year rate briefly turned negative for the first time. Gold and silver rose to two-year highs.
After rallying last week on bets central banks will work to limit the fallout from the so-called Brexit, global equities are retreating again as the knock-on effects of the vote become evident. Three asset managers froze withdrawals from UK real-estate funds on Tuesday following a flurry of redemptions and the Bank of England relaxed capital requirements for lenders. German factory orders unexpectedly failed to rise in May, data showed on Wednesday, and the chance of a 2016 US interest-rate hike has been all but killed off in the futures market.
“Equities still exhibit a lot of risks,” said Mark Lister, head of private wealth research at Craigs Investment Partners in Wellington, which manages about $7.2 billion. “The lack of confidence and growth will weigh on sentiment. For anyone that’s reaped the benefits of the equity bull market it’s definitely time to consider taking some profits, if you haven’t already, and move to a more defensive stance.”
The Federal Reserve is scheduled to release the minutes of its 14-15 June policy meeting on Wednesday and a gauge of US services output is also due. European Central Bank president Mario Draghi is set to speak in Frankfurt, while monetary authorities in Sweden and Poland are forecast to leave monetary policy unchanged following reviews.
Stocks
The Stoxx Europe 600 Index declined 0.6% as of 8:10 am London time. Futures on the S&P 500 Index fell 0.3%, after the US benchmark dropped 0.7% in the last session.
The MSCI Asia Pacific Index slid 1.4%, after falling for the first time in a week on Monday. Benchmarks in Hong Kong, Japan, South Korea and Taiwan lost 1.6% or more. Financial markets in India, Indonesia, Malaysia, the Philippines and Singapore were closed for holidays.
There are “fears the global economy will worsen due to Europe,” said Mitsuo Shimizu, deputy general manager with Japan Asia Securities Group Ltd. “The UK’s economic outlook is blurred with uncertainty and the pound’s recent weakness is likely to encourage speculative buying in the yen.”
Toyota Motor Corp., the world’s largest automaker, slid 1.7% in Tokyo and BHP Billiton Ltd, the biggest mining company, tumbled 3.8% in Sydney. China Resources Beer Holdings Co., the maker of the Snow brand of beer, sank to a two-month low in Hong Kong after saying it plans to raise HK$9.5 billion ($1.2 billion) in a share sale to help finance the purchase of a remaining stake in a Chinese venture with SABMiller Plc.
Currencies
The yen jumped 0.7% to 101.05 per dollar, taking its post-Brexit advance to more than 5%. The pound slid as much as 1.7% to $1.2798, its weakest level since June 1985. Julius Baer Group Ltd, which had the most accurate forecasts for major currencies in Bloomberg’s latest quarterly rankings, predicts sterling will slide to $1.16 by the end of September.
Also Read: Brexit accelerates the British pound’s 100 years of debasement
“The yen is taking the brunt of the pound selling,” said Takuya Kawabata, an analyst at Gaitame.com in Tokyo. “It’s a risk-off market triggered by the pound. We need to continue to remain wary of risk aversion prompted by the UK.”
The currencies of New Zealand. Russia and South Africa—commodity-exporting nations—all dropped by at least 0.4%. The Bloomberg Dollar Spot Index was little changed, after a 0.8% jump on Tuesday that marked its first advance in more than a week.
South Korea’s won led declines in Asia, sinking 0.9% versus the greenback. The yuan dropped as much as 0.24% to a five-year low of 6.6980 per dollar after ABN Amro Bank NV, Credit Agricole CIB and Goldman Sachs Group Inc. cut forecasts for the currency on Tuesday.
Bonds
Securities in the Bloomberg Global Developed Sovereign Bond Index, with an average life of about 10 years, yield a record-low 0.40%. Yields on 10-year government bonds in Australia, Japan and the US sank to fresh records, with the latter falling as much as four basis points to 1.34%. Similar-maturity German notes were little changed, after the yield touched an all-time low of minus 0.19%.
“In the risk-off environment produced by international events, there is a global rush to buy super-long sovereign debt, and bonds that still offer some yield are going to be most in demand,” said Hideo Suzuki, the chief manager of foreign exchange and financial products trading at Mitsubishi UFJ Trust & Banking Corp. in Tokyo.
Declining prospects of a Fed rate hike have spurred a torrent of demand for Treasuries, with almost $10 trillion of securities in the Bloomberg Global Developed Sovereign Bond Index yielding less than zero, up from about $9 trillion a week ago. In addition to experimenting with negative rates, some monetary authorities abroad are buying government debt, reducing the supply for investors who count on fixed-income assets.
Commodities
Gold climbed as much as 1.1% to $1,371.39 an ounce, the highest level since March 2014, and silver gained 1.3%. Investment in China’s largest exchange-traded fund backed by bullion—Huaan Yifu Gold ETF—surged to a record on Tuesday.
“Investors are pouring money into gold as there’s increasing anxiety over the global economic outlook as well as political uncertainty,” said Wu Zhili, Shenzhen-based analyst at Shenhua Futures Co. “The accommodative stance of central banks is also favourable for commodities, especially precious metals.”
Crude oil was up 0.2% at $46.69 a barrel in New York, after tumbling 4.9% on Tuesday. The price climbed as high as $51.67 last month, almost double the 12-year low of $26.05 recorded in February.
Copper fell 0.4% in London, declining with lead and tin. Rubber tumbled as much as 6% in Japan, the biggest intra-day loss since 13 May.
“A sell-off in global stocks is boosting concerns about economic growth, leading to sales of industrial raw materials including rubber,” said Kazuhiko Saito, an analyst at Fujitomi Co., a broker in Tokyo. Bloomberg
