Brexit fears spook global financial markets

Fears Britain is on the verge of voting to leave the European Union next week coursed through global financial markets on Monday, sending Asian and European shares sharply lower and the pound to an eight-week low.

The world economy is looking shaky and weak jobs data suggest even the United States is not ready for the higher interest rates that banks say they need to shore up profitability, while concerns that a vote for Brexit could tip Europe back into recession have lurked in the background for weeks.

Those concerns came to the fore on Monday, however, as European shares fell 1.5 per cent drop and Asian stock markets logged their biggest falls in four months after a poll late on Friday gave Britain's "Leave" camp a 10-point lead. Other polls are tighter, but money markets have now abandoned expectations, high just weeks ago, that the US Federal Reserve could raise official borrowing costs on Wednesday, just 8 days before the UK vote.

Instead, the worry is that the Fed could use language that quells expectations of a move this year at all.

More broadly, after eight years of ultra-low rates and outright money-printing, investors wonder if central banks have much ammunition left should the uncertainty that a Brexit would bring for thousands of businesses weaken demand and investment further.

“We’re in uncharted territory in front of the Brexit vote, and then there’s also the Fed this week. So the wall of worry is quite high at the moment,” said Zeg Choudhry, managing director at LONTRAD.

“All the banks are a little bit lower, and they’re the ones which are likely to get hit. For the next two weeks, you’ve got to be slightly mad if you’ve not got your money in defensive stocks.”

The news out of China, global investors’ other big concern this year, was poor, with data showing fixed-asset investment slipped below 10 percent for the first time since 2000.

Stock markets in Tokyo, Hong Kong and Shanghai all fell by around 3 per cent. Moves in Europe, where investors have been preparing for the British vote for months, were only slightly more subdued.

The Frankfurt and Paris stock exchanges both fell around 1.5 per cent.

The index of major European bank shares, hammered this year by concerns over the impact prolonged negative interest rates are already having on lenders’ profitability, fell 2.2 per cent.

In contrast, Britain's FTSE 100 fell just 0.4 percent, and both Deutsche Bank and JP Morgan said they remained overweight UK equities into the vote.

“In the case of a ‘Leave’ vote in the UK referendum ... we expect UK equities to outperform the European market, given the likely GBP (British pound) depreciation in such a scenario as well as the market’s defensive sector structure,” Deutsche Bank strategists said in a note.

Reuters