24 Jun 2016

Pound fell to its lowest since 1985 after Britain vote to leave EU

Britian’s vote to leave the European Union battered the British pound by more than 11% Thursday night and into Friday morning, pushed down stocks in Asia and pointed to a day of steep falls across the world’s financial markets. It was a brutal drubbing for investors who had stacked up bets that the U.K. would choose to stay.

The pound traded as low as $1.3230 in London’s early hours, as a pink-fringed dawn rose over the city and the British Broadcasting Corp. called the referendum for Leave. That was the lowest level against the dollar since 1985, and an epic move for a developed-market currency. The pound edged back up and was at $1.36 by 7 a.m. Just hours before, it had peaked above $1.50. Futures markets in the U.S. pointed to the S&P 500’s opening down 5%; in Britain they indicated a fall in the benchmark stock index of nearly 9%.

Nothing was spared from the tumult. Brent, the international oil price gauge, shed 4.97% to $48.38 a barrel in early trade on Friday. London copper prices dropped nearly 3% to $4,643.50 a metric ton.

The vertiginous moves portend unruly trading ahead. Stocks had been on a steady uplift this week following a series of polls that suggested a victory for Remain. That enthusiasm continued through the day Thursday. By the time polls closed at 10 p.m. British time, gamblers had staked so many bets for Remain that betting exchange Betfair calculated a 94% chance that the side would carry the day.

Then the counting started. A hairbreadth win for Remain in Newcastle, in the northeast of England, started to deflate the pound, as did reports of Leave victories in smaller districts. Sunderland, a Labour-leaning port city where anger at the EU runs high, reported a 61.3% Leave tally. The pound slammed down, falling more than 3% in minutes.

In Tokyo, Yusuke Sakai, a senior trader at T&D Asset Management, got a shock geography lesson. “Wow!” he said. “What a big move. I don’t even know where this is? It must be a rural town or something. The currency is moving more than ¥2.”

Angus Nicholson, a market analyst at equities trader IG Markets in Melbourne, Australia, said a sense of high anxiety swept global markets as the pound plunged in the space of seconds, and it was evident in messaging coming across screens from the firm’s U.K. home office.

Mr. Nicholson said for a few moments “it was squeaky bum time” in his dealing room, as an earlier sense of reassuredness around a win for the Remain camp was swept aside. “A 4% move within a second is pretty wild. In currency-market terms, it’s a black-swan event.”

Bob Browne, chief investment officer at Northern Trust, was sitting in his car Thursday evening in Highland Park, Ill., waiting for his son to come out of a doctor’s appointment. He was checking his cellphone for the latest voting results, with early signs that an upset was in the cards. “Some of the early polls have come in, and the market is revisiting its rock-solid assumption just a few hours ago that the U.K. would stay in,” he said.

By 3 a.m. in London, five hours after the polls had closed, Betfair put the odds of Britain’s remaining at 56%. A victory for Leave in Swansea, in South Wales, helped drive the pound still lower—down below $1.41, off more than 5% from just before the polls closed.

The day had started better for traders who had staked money on Remain. An online survey conducted on the day of the referendum by pollsters YouGov showed 52% support for the Remain camp, against 48% for Leave. The survey was released minutes after the polls shut.

The YouGov survey matched a number of other signals that Remain had the upper hand in the final stretch of a hard-fought, seesawing contest. Ben Page, chief executive of pollster Ipsos Mori, tweeted Thursday night that his company continued polling Wednesday and Thursday, suggesting 54% support for the pro-EU camp, against 46% for the campaign to leave the EU.

Shortly after the polls closed, UK Independence Party leader Nigel Farage, who has spearheaded the Leave camp, said that he expects the Remain camp to win, according to broadcaster Sky News. Mr. Farage later told the Press Association newswire that his estimate is based on “friends in the financial markets who have done some big polling.”

But the early counting sharply shifted that sentiment, and with it many markets. Stock futures fell sharply in the early hours. Investors were also keeping a careful watch on gold, which has served as a hedge against Brexit, and government bonds—especially those of the U.K. Gold futures shot up as the result became plain and were up 5% early Friday, at $1,326.40 an ounce. The precious metal rallied to as high as $1,317.51 an ounce last week as risk assets sold off around the world.

But the center of the market’s attention is the pound. The currency had closely tracked the betting odds of a Remain victory, which rose from 58% on Thursday to 88% just before polls closed at 10 p.m. U.K. time.

One-month implied volatility in sterling—a measure of the price of options contracts on the pound—reached its highest levels since the 2008-09 financial crisis last week, but has declined slightly since.

The Stoxx Europe 600 climbed 1.5%, London’s FTSE 100 gained 1.2% and Germany’s DAX rose 1.8%. It was the fifth consecutive session of gains for all three indexes.

In recent days worries that a British exit from the EU will stoke global economic uncertainty has roiled financial markets, spurring wild swings in the pound, euro and other currencies. That has prompted banks to caution clients against taking large positions in a market where currencies could gyrate and liquidity may dry up. Banks are widening spreads—the gap between pricing for bids and offers—to account for the greater risks from expected turbulence.



Credit: Wall Street Journal

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