A weekend to digest the implications of last Thursday’s decision by the United Kingdom to end its more than 40-year membership in the European Union didn’t do much to quell worries across global markets. In the two trading days following the referendum, global equity markets shed $3.01 trillion in value, according to data compiled by S&P Dow Jones Indices.
While U.S. equity markets ended off session lows, the broader averages saw their worst two-day plunge in 10 months as investors extended last week’s rush out of risk assets. The Dow Jones Industrial Average dropped 260 points, or 1.50% to 17140. The S&P 500 shed 36 points, or 1.81% to 2000, while the Nasdaq Composite shed 113 points, or 2.41% to 4594.
The CBOE Volatility index, which measures investor expectations of volatility over the next 30 days, dropped 8.85 % on Monday to 23.48 after touching a 4-1/2 month high last week.
Cyclical sectors saw the biggest declines as investors sought the safety of defensive names including utilities, telecom, health care and consumer staples. The moves helped send stocks like American Water Works (NYSE:AWK), Consolidated Edison (NYSE:ED) and Edison International (NYSE:EIX) to fresh lifetime highs.
Gold prices ended up just slightly on the session, though the precious metal saw its biggest two-day percentage gain since 2011, rising to $1,322 a troy ounce. Traders also continued to snap up government debt, traditionally seen as a safe-haven in times of uncertainty and heightened volatility. The yield on the 10-year U.S. Treasury bond, which moves inversely to its price, fell 0.116 percentage point to 1.461%, its lowest since July 2012. In currencies, the Japanese Yen, seen as a safety play, rose 0.26% against the U.S. dollar, while traders continued to ditch positions in the British pound, which suffered losses of more than 10% following Thursday’s vote. On Monday, the currency shed 3.61% against the greenback.
Meanwhile, oil prices tumbled more than 2.5% as fears about a global slowdown hit crude benchmarks, and the financial sector saw its worst two-day drop since November 2011 after falling the most in nearly five years on Friday. Wall Street continued to worry about how the so-called Brexit vote would impact central bank policy around the world, while concerns persisted about how effective monetary policy efforts would be going forward. The financial sector shed nearly 2.79% on Monday as materials lost more than 3.5%.
Global investors ditched positions in the European banking sector as evidenced by the 7.7% plunge in the STOXX Euroep 600 banks index. The biggest U.S. banks also showed steep losses as Goldman Sachs (NYSE:GS) hit a fresh 52-week low of $138.20 a share. Bank of America (NYSE:BAC) shares shed 6.31%, while Morgan Stanley (NYSE:MS) dropped 3.71%, JPMorgan (NYSE:JPM) declined 3.34%, Citigroup (NYSE:C) dropped 4.52% and Wells Fargo fell 1.53%.
“The severe decline in European bank stocks is especially concerning as it is harder to argue that monetary policy will be impactful if European financial institutions are under intense pressure, Dennis DeBusschere, Evercore ISI senior managing director, said in a note.
Ron Weiner, managing director of RDM Financial Group at High Tower, said while global central banks might continue to try to prop up their economies through fiscal stimulus measures, additional effort may only prove futile as previous attempts, in his view, have been unsuccessful at jumpstarting the global economy.
DeBusschere added that if the rush out of cyclical names continues, it would be indicative of an ongoing decline in global-growth expectations, which would put more pressure on business and consumer confidence.
Economists at Goldman Sachs lowered their forecasts for U.K. growth by 1.8 percentage points to 0.2%, and noted they see the region facing technical recession in the first half of 2017. They also expect the Bank of England to slash interest rates by 0.25% at its August meeting, and say the European Central Bank and Bank of Japan could also take steps to ease monetary policy further. Meanwhile, Goldman economists see a 40% chance of a rate hike in the U.S. by December.
“Why would the Fed lift rates in such an unsettled environment?” they noted. “The reason is that, in our baseline forecast, the turmoil gradually settles down and the U.S. economy continues to make cyclical progress from a point at which it is already close to the mandate. However, the risks to this forecast are significant and further downward adjustments could well follow.”
Still, Goldman emphasized the Brexit shock is a regional event, not a global one, and as such, it revised U.S. growth down by 0.1% to 1.9% in 2016 and 2% economic growth by the end of next year.