European stocks swoon in flight to safety

The growing shadow of the Brexit vote over the global economy sent traders fleeing to safety.

European stocks swooned as the fallout from Britain’s vote to leave the UK continued.

The pound dived to fresh 31-year lows Wednesday, bond yields were squeezed and equities hammered as the growing shadow of the Brexit vote over the global economy sent traders fleeing to safety.

With last week’s global rally — inspired by promises of central bank stimulus after the poll — consigned to history, high-risk assets such as emerging currencies and oil have also been sent tumbling as fresh fears kick in.

Wednesday’s decline was “logical”, said Michael Jacoby, head equity trader at Oddo. “The market had recovered too strongly and too quickly.” Safe-haven assets gold and silver reached two-year highs while yields on high-quality government bonds dropped further, and the yen and the Swiss franc rose.

The pound, however, sank to $US1.2798 at one point, its lowest level since June 1985, before recovering somewhat to just above $US1.29.

“Just when you thought it was ‘safe to go back in the water’, the pound got pounded as speculation around Brexit forms into something more concrete,” said Stephen Innes, senior trader at OANDA Asia Pacific.

London’s FTSE 100 index was down 1.3 per cent at the close, while Frankfurt’s DAX 30 fell 1.7 per cent and CAC 40 in Paris by 1.9 per cent.

Shares in Banca Monte dei Paschi di Siena rebounded in Milan after two straight session of heavy losses on hopes that the Italian government will help find a solution to the bank’s debt problems. Some analysts fear a bank crisis in Italy and eurozone turmoil are looming.

Shares in Telecom Italia plunged following an announcement that Italy could soon get a low-cost mobile operator.

Some analysts said the worst may not be over for the British currency. “Even though investors should by now have priced into sterling slower growth, lower rates, renewed quantitative easing and prolonged political discord that does not mean they cannot mark it down further,” analysts at Moneycorp said.

Adding to the gloom was news that two more British commercial property funds had suspended trade and blocked client redemptions, taking the total this week to five.

With London’s role as financial hub fraying after the Brexit vote, Paris on Wednesday stepped in to welcome bankers, investors and businesses who may want to escape the uncertainty hanging over the City’s role by offering incentives. Prime Minister Valls also confirmed plans to slash France’s corporate tax rate.

In Europe, the yield on 10-year German government bonds pushed below -0.20 per cent to strike a record low.

On oil markets, both Brent crude and West Texas Intermediate were down.

AFP