Wall Street losses deepen after Brexit vote

Australian stocks face more losses after markets in the US and Europe reeled despite reassurances from UK leaders.

Wall Street continued to lose ground as investors consider the fallout of Britain's vote to leave the European Union. Picture: AP Photo/Richard Drew.

Losses deepened in US and European stocks overnight, as the UK’s vote to leave the European Union continued to shake financial markets.

The British pound fell to a three-decade low and the pan-European stock index suffered its worst two-day decline since 2008.

London’s FTSE 100 index, which boasts many international companies, fell 2.5 per cent, while eurozone indices saw even bigger losses. Paris and Frankfurt both fell 3 per cent.

The Dow Jones Industrial Average declined 261 points, or 1.5 per cent, while the S & P 500 dropped 1.8 per cent and the Nasdaq Composite fell 2.4 per cent. After Friday’s plunge, it is Wall Street’s worst two-day fall in about 10 months.

Compounding Britain’s woes, Standard & Poor’s became the third large ratings agency to strip the UK of its AAA credit rating, saying the vote to leave the EU creates both economic and constitutional issues.

The Australian market looks set to open lower after the overnight losses on Wall Street. At 6.45am (AEST), the share price index was down 61 points at 5,007.

Despite the benchmark S&P/ASX200 index closing up 0.47 per cent yesterday, the Australian sharemarket is now on track for one of the worst financial year performances since the GFC.

Investors bought haven assets like government debt, sending the yield on the 10-year UK government bonds below 1 per cent for the first time and 10-year Treasury yields to their lowest level since 2012.

The flight to safety comes despite efforts from British politicians to reassure nervous investors and voters about the health of the economy and its ability to weather the shock of the unexpected vote.

UK Treasury boss George Osborne said the nation had a strong economy and a healthy financial system, while Prime Minister David Cameron called the UK’s economy “one of the strongest” in the world.

US Treasury Secretary Jacob Lew said the Brexit vote is “an additional headwind” for the US and global economies but “there is no sense of a financial crisis developing”.

Investors continued to sell off risky assets like oil and switch into gold as uncertainty prevailed over Britain’s path to separation from the EU.

Major US stock indexes have erased weeks of gains in the past two sessions as questions about the impact of the UK’s departure added to persistent concerns about the world’s economy and the ability of policy makers to stoke growth and inflation.

“There’s no playbook for this,” said Bill Nichols, head of US equities at Cantor Fitzgerald.

The Stoxx Europe 600 has lost 11 per cent since result of the referendum, its largest two-day percentage decline since October 2008, and the British pound fell as low as $US1.3121, its weakest since 1985, even after British Chancellor of the Exchequer George Osborne issued a statement reassuring investors that the UK economy remained resilient and its banks and financial system were healthy.

Traders said selling remained orderly, even as investors face a range of unknowns, including the makeup of Britain’s political leadership, the country’s future relationship with the EU, the long-term impact on business confidence and investment in Europe and the response it will prompt from politicians and central banks around the world.

“This is likely to be a fairly prolonged process that unfortunately is going to be a bit of a messy negotiation — that’s not great for asset prices alone,” said Chris Lee, portfolio manager at Fidelity Investments.

Bank shares were hard hit amid concerns that the UK’s exit could hurt lenders operating in the region and lengthen a period of ultralow interest rates that has pressured bank profits. Expectations for the Federal Reserve to raise interest rates this year have fallen sharply since the vote.

Financial shares in the S & P 500 fell 2.8 per cent, while the KBW Nasdaq Bank index of large US commercial lenders declined 5.1 per cent and the Stoxx Europe 600 Banks index fell 7.7 per cent to its lowest close since 2011.

Asset managers and insurers also suffered, with Invesco dropping 9.4 per cent, while MetLife fell 7.4 per cent.

Investors bought government debt and other havens. Yields on 10-year UK government bonds fell below 1 per cent for the first time, according to data from Tradeweb, while the yield on the benchmark 10-year US Treasury note fell to 1.461 per cent. The yield’s record-low close was 1.404 per cent, set in July 2012. Yields move inversely to prices.

The only two sectors to rise in the S & P 500 were utilities and telecom, which are often used as a proxy for bonds. Investors have poured into the relative safety of such dividend-paying stocks, sending both up 18 per cent in 2016.

Last week’s rally ahead of the results intensified the pace of stock market declines, said Bruce Bittles, chief investment strategist at Robert W. Baird & Co. Despite worries about valuations and the impact of a strengthening dollar on exporters’ profits, low yields in the bond market leave few alternatives for investors outside of equities.

“Stocks don’t have much competition,” he said. “Very low rates, very low inflation and a friendly monetary policy backdrop is going to drive the market.”

Asian shares had a modest rebound yesterday following heavy losses on Friday. The Nikkei Stock Average gained 2.4 per cent after an adviser to Prime Minister Shinzo Abe said Japan now has a “little more ground” to rationalise intervening in the currency markets.

The Shanghai Composite Index added 1.5 per cent after the People’s Bank of China weakened the yuan by the most since August, while shares in Hong Kong edged down 0.2 per cent.

In commodities, US crude oil fell 2.7 per cent to $US46.33 a barrel, while gold for June delivery rose 0.2 per cent to $US1,322.50 an ounce, following its biggest one-day gain since 2013.

Dow Jones, AFP