After a modestly stronger open, which saw sterling rebound to just under 1.35, the British currency has taken another sharp leg lower in recent trading tumbling another 3%, to a low of 1.3224 – taking out Friday’s post-vote lows when the currency plunged over 8% – and dropping to fresh 31 year lows, as it remains under heavy selling pressure as of this moment.
As the following chart shows, with the expetion of just one currency, cable is the worst performing in the world this morning on ongoing Brexit fears.
Today’s 3%+ drop has added to an unprecedented 8.1% tumble on Friday, which was almost double the 4.1% decline on Black Wednesday in 1992, when the U.K. was forced out of Europe’s exchange-rate mechanism.
The flight to safety has meant that gains in U.K. government bonds pushed the 10-year gilt yield below 1% for the first time, while the FTSE 100 slid 1.3%,
And with money rushing into safety, it promptly left the local banks, as a result both Barclays and Royal Bank of Scotland fell more than 10% leading to their stock being halted due to excess volatility.
- BARCLAYS HALTED IN LONDON ON VOLATILITY AFTER SHRS FALL 11.5%
- RBS HALTED IN LONDON ON VOLATILITY AFTER SHRS FALL 14.2%
Not helping the local banks was a double-downgrade of Barclays by Jefferies to underperform from buy as its IB operations are too exposed to downside risk on capital and earnings, Jefferies said. The mid-market US bank cut its BARC PT to 115p vs 287p noting that Brexit outcome “changes everything”:
- Management was already busy with Africa disposal, non-core asset reductions, trying to boost returns, capital ratios
- Brexit calls Barclays’s IB into question
- Outlook for lower rates, higher impairments, RWA density put pressure on profit
- Sees Barclays earnings power “substantially diminished”
- Sees Barclays 2018 statutory EPS at “miserly” 16.4p
It’s not just these two banks: the entire UK banking sector is down 13% today, after plunging 17% on Friday, meaning in just two days UK banks have lost nearly a third of their market cap.
Meanwhile, traders were on the sidelines, unwilling to commit capital: “People are finding it difficult to comprehend what Brexit implies for the future — we don’t know yet what the magnitude of the shock will be,” said Steven Barrow, head of Group-of-10 strategy at Standard Bank Group Ltd. in London. “So far, in terms of sterling-dollar, we’ve seen half the decline we’re likely to see this year.”
“We’ve seen so many developments around Brexit over the weekend since the FTSE closed and things are now looking even more concerning,” Angus Nicholson, Melbourne-based analyst at IG Ltd., said by phone. “It’s hard to have any idea about where fair value for the pound should be when you look at the fact that Scotland and Northern Ireland could no longer be part of the U.K. within the next year or two. ”
Pessimism prevailed: “From here, a 10 percent fall relative to the U.S. dollar seems about right,” Kit Juckes, a London-based strategist at Societe Generale SA, said in a Bloomberg Television interview on Sunday. “The low point will be somewhere between $1.20 and $1.25. However much you want to say the U.K. will survive and calm down, the uncertainty is going to have an economic impact, and the uncertainty is magnified at the beginning by the politics.”
As reported yesterday, while the market urgently needs clarity on whether or when the UK will trigger the Article 50 claus of official separation, for now the UK is taking its time, and that is taking a toll on the market. Britain and the rest of Europe are now feeling their way through the unprecedented situation, with an early sticking point being the timing of the exit negotiations themselves. Cameron, who will address Parliament on Monday, said Friday that the U.K. will wait until a new prime minister is in place before triggering the Brexit process by invoking Article 50 of the Lisbon Treaty. European leaders have called for talks to begin immediately.
As Bloomberg reminds us, while pro-“Leave” politicians sought to minimize the financial turmoil seen on Friday, recent European history has shown how politics can start driving markets, only for the relationship to swiftly reverse. During the euro region’s debt crisis at the start of this decade, investors played the role of vigilantes by dumping sovereign bonds and pushing governments to act.
“There’s a lot of questions that need to be answered right now — the longer this takes the more the pressure is going to be on the pound,” Vasileios Gkionakis, head of currency strategy at UniCredit SpA in London, said in a Bloomberg Television interview on Sunday. “The reaction we saw in the market on Friday was largely the result of speculative activity. What we haven’t really seen is the flow, the reversal of flows coming out of the U.K. When these start unwinding I’m pretty sure that we’re going to see some enormous pressure on the pound.”
A drop below $1.20 is possible, according to Gkionakis.
And while much of this pressure on UK assets may be forced to “assist” the local population with reconsidering its “Leave” vote, the bigger question is when will today’s sharp contagion spread to all of Europe.
Because while the shock facing the UK was expected, keep a close eye on Europe’s other banks, which as we wrote yesterday will be the true tell if the “market breaks” here: recall that according to Citi’s Matt King it is all about the banks…
… and as of this morning Deutsche Bank just hit a new all time low of 12.30, down 6.5% on the day. Needless to say, if DB goes, all of Europe will follow.
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