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Shares dive after Brexit

June 27, 2016

European shares have continued their slide, after Britain's decision to leave the EU shocked financial markets on Friday, sending the British pound to its lowest level in more than 30 years.

Brexit Börse in New York City
Image: Getty Images/S. Platt

European shares slumped further on Monday weighed down by uncertainty over Britain's EU exit and ignoring reassurances by Britain's finance minister George Osborne that the UK economy was fundamentally strong.

In mid-day trading, London's benchmark FTSE 100 index of blue-chip companies fell 1.4 percent, compared with Friday's closing level. Frankfurt's DAX 30 index dipped 1.5 percent and the CAC 40 in Paris shed 1.36 percent.

Shares in banks, airlines and property companies plunged on the London stock exchange as investors singled out the three sectors as being the most vulnerable to Britain's decision to leave the EU.

Trading in Royal Bank of Scotland (RBS) and Barclays shares was even briefly halted on volatility. The London Stock Exchange said the suspension came when they briefly moved out of the trading range of 8 percent - an automatic action. RBS shed 14.6 percent and Barclays was down 10 percent. Trading resumed after five minutes.

Following Friday's selloff, "concerns about the banking sector continue to be a pressure point for investors," Michael Hewson, chief market analyst at CMC Markets UK, told the news agency AFP. He noted that banking stocks in the eurozone also came under heavy selling pressure again, notably Deutsche Bank in Germany, as well as Italian and Spanish banks. Among London property shares, Taylor Wimpey fell 12.4 percent.

Analysts agreed that the fallout from Britain's EU referendum would continue to ripple through markets throughout the week.

Lex Van Dam, hedge fund manager at Hampstead Capital, said the Brexit decision had taken markets by total surprise. "I would remain on the sidelines - no reason to step in yet," he told the news agency Reuters.

But Nick Stamenkovic from RIA Capital markets thinks the UK stock market is "relatively stable" in view of the momentous decision, adding that reassuring comments about the British economy from Finance Minister George Osborne supported stocks.

On Monday, Osborne sought to calm markets after the country's shock vote to leave the EU wiped $2.1 trillion (1.9 trillion euros) off market valuations on Friday and sent the pound collapsing to a 31-year low against the dollar. He said Britain's economy was "as strong as could be" to deal with the fallout of Thursday's Brexit vote.

British pound under siege

However, the British currency remained vulnerable particularly against the dollar as investors continued to rush into safe-haven assets. The pound dropped to $1.3219, marking its lowest level in 30 years.

Traders believe price swings are likely to remain extreme given the lack of clarity on who runs the British government, the renewed prospect of a Scottish secession, and doubts about the EU's ability to contain calls by anti-EU parties across the continent.

Moreover, investors on Monday began pricing in a chance of a rate cut, with some analysts expecting the Bank of England to consider quantitative easing to cushion the economy.

"The overnight indexed swap market is currently pricing 38 basis points of cuts from the BoE over one-year time horizon," Petr Krpata, currency strategist at ING, told AFP. "While we deem sterling as undervalued at these levels, the mixture of political uncertainty, flagging growth and concerns about the current account deficit should keep a lid on sterling during the weeks and months ahead and prevent any meaningful or long-lasting recovery," he added.

The euro was also under pressure, pulled down by sterling, while safe-haven currencies like the yen and the Swiss franc extended gains, much to the discomfiture of the Japanese and Swiss central banks.

Japanese Prime Minister Shinzo Abe said on Monday he had instructed Finance Minister Taro Aso to watch currency markets "ever more closely" and take steps if necessary.

In addition, Abe ordered the Japanese central bank to ensure ample liquidity in markets, with an eye on expanding planned stimulus steps to total more than 10 trillion yen ($98.03 billion, 88.7 billion euros), sources told Reuters.

"Risks and uncertainty remain in financial markets," Abe said. "We need to continue to work toward market stability."

The yen briefly soared above the key threshold of 100 to the dollar on Friday as investors hoarded the safe-haven currency after the Brexit vote, unnerving Japanese policymakers worried about the effect a strong yen could have on exports.

uhe/kd (AFP, Reuters, dpa)