Brexit fear factor sends stocks spinning

[June 13, 2016]  By Patrick Graham

LONDON (Reuters) - Fears Britain is on the verge of voting to leave the European Union next week coursed through global financial markets on Monday, sending Asian and European shares sharply lower and the pound to an eight-week low.

The world economy is looking shaky and weak jobs data suggest even the United States is not ready for the higher interest rates that banks say they need to shore up profitability, while concerns that a vote for Brexit could tip Europe back into recession have lurked in the background for weeks.

Those concerns came to the fore on Monday, however, as European shares <.FTEU3> fell 1.5 percent drop and Asian stock markets logged their biggest falls in four months after a poll late on Friday gave Britain's "Leave" camp a 10-point lead.

Other polls are tighter, but money markets have now abandoned expectations, high just weeks ago, that the U.S. Federal Reserve could raise official borrowing costs on Wednesday, just 8 days before the UK vote. Instead, the worry is that the Fed could use language that quells expectations of a move this year at all.

More broadly, after eight years of ultra-low rates and outright money-printing, investors wonder if central banks have much ammunition left should the uncertainty that a Brexit would bring for thousands of businesses weaken demand and investment further.

"We're in uncharted territory in front of the Brexit vote, and then there's also the Fed this week. So the wall of worry is quite high at the moment," said Zeg Choudhry, managing director at LONTRAD.

"All the banks are a little bit lower, and they're the ones which are likely to get hit. For the next two weeks, you've got to be slightly mad if you've not got your money in defensive stocks."

The news out of China, global investors' other big concern this year, was poor, with data showing fixed-asset investment slipped below 10 percent for the first time since 2000. Stock markets in Tokyo, Hong Kong and Shanghai all fell by around 3 percent.

Moves in Europe, where investors have been preparing for the British vote for months, were only slightly more subdued. The Frankfurt and Paris stock exchanges both fell around 1.5 percent.

The index of major European bank shares, hammered this year by concerns over the impact prolonged negative interest rates are already having on lenders' profitability, fell 2.2 percent.

In contrast, Britain's FTSE 100 fell just 0.4 percent, and both Deutsche Bank and JP Morgan said they remained overweight UK equities into the vote.

"In the case of a 'Leave' vote in the UK referendum ... we expect UK equities to outperform the European market, given the likely GBP (British pound) depreciation in such a scenario as well as the market's defensive sector structure," Deutsche Bank strategists said in a note.

A man walks past a display of the Nikkei average and other market indices outside a brokerage in Tokyo, Japan April 19, 2016. Japan's Nikkei share average soared on Tuesday morning, as a weak yen and a bounce in oil prices helped the market erase a sharp drop from the previous day. REUTERS/Thomas Peter

YEN BREAK

On currency markets, sterling fell almost 1 percent against the dollar after sinking by as much as 3 full cents in value on Friday. It was down by more, 1.2 percent, at 79.86 pence per euro.

Options market pricing howed expectations for the biggest swings against the euro on record, and analysts at UBS raised the prospect of a cut in British interest rates and another round of quantitative easing if the economy struggles after the referendum.

"If activity does slow further beyond the end of the second quarter, the market is likely to rapidly start considering how (the Bank of England) may choose to enact any further easing," economists from the Swiss group said in a note.

The Bank of England meets on Thursday. [BOE]

Traditionally investors' first choice in times of financial and economic stress, the yen climbed 1 percent against both the dollar and euro. 

Those gains took the Japanese currency past long-term resistance around 106.50 yen per dollar and put more pressure on the Bank of Japan to act against the currency's 14 percent rise this year when it ends a regular meeting on Thursday.

"While the pound is the worst-performing G10 currency versus the dollar this year, the yen is by far the best," said Derek Halpenny, European Head of Global Markets Research at Bank of Tokyo-Mitsubishi in London.

"The continued surge of the yen will lift expectations that the BOJ may surprise the markets and announce some additional monetary easing."

(Additional reporting by Alistair Smout in London; Editing by Hugh Lawson)

[© 2016 Thomson Reuters. All rights reserved.]

Copyright 2016 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.