London’s leading stock market index has dropped for a third day and the pound touched a two-month low as Brexit fears gripped investors in the run-up to the EU referendum.
Sterling slipped against the dollar and euro, but recovered to gain 1.3% as it reached levels of volatility not seen since the financial crash of 2008. Against the dollar the pound fell to almost $1.41 before touching $1.43 as values continued to swing.
Some analysts said thin trading volumes meant most investors were sitting out the last week before the 23 June vote, leaving the market to be dominated by speculators increasingly concerned by the apparent crumbling of support for the remain campaign.
Daniele Bianchi, an economist at Warwick business school, said volatility was likely to get worse as polling day approached.
“Such uncertainty in itself represents something undesirable for investors and business, which are likely to hold hiring, investment and spending decisions. All these things will negatively affect the economy in the short term.”
The pound has dropped more than 4% this year, the worst performance among a group of 10 major currencies, as investors assess the risks of an exit. It reached a seven-year low of $1.3836 in February after David Cameron announced the date of the vote, and has since fluctuated, often wildly, as polls suggested both sides could still prevail.
London’s FTSE 100 fell 0.3% in morning trading before ending the day down 1.1% at 6,044.9 points, with Lloyds Banking Group the biggest faller, down 4.2%.
The concerns spread to European bond markets, where the price of Spanish and Italian 10-year bonds slumped and yields suffered their biggest one-day jump in just over two months, while Portugal’s 10-year bond yield jumped 10 basis points in its largest daily rise in about five weeks. Bond yields reflect the interest rate demanded by investors when they lend to governments by buying their debt.
German 10-year yields, which serve as a refuge for investors in times of stress, hovered just above the 0.01% record low touched last week, with many analysts expecting a drop below zero in the coming days.
“While the UK referendum vote remains on a knife edge, we will continue to see pressure on spreads,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank.
Global government bonds trading with sub-zero yields now exceed $8tn (£5.6tn), a record high according to investment JPMorgan. Investors are concerned about a global slowdown in growth and trade, with Brexit only one of multiple reasons for investors to remain cautious.
The referendum vote is expected to have far-reaching consequences for the rest of the continent, where support for the economic and political union is wavering in the face of low growth and high unemployment.
