What to Watch for in Trading After Shock of ‘Brexit’ The Brexit news is huge ...your thoughts?
The global financial system has in recent years managed to absorb rolling debt crises in Greece, military clashes in Ukraine, down-to-the-wire budget fights in Washington and a shock currency devaluation by China.
But will it handle Britain’s vote on Thursday to leave the European Union as well?
The lesson of the financial crisis of 2008 is that problems in one country can spread around the world through the markets and the banking system. And so far on Friday, there have been some gut-wrenching moves in global markets.
The British pound plunged to a level not seen in decades.
Italy’s stock market was down more than 10 percent, and France’s was off over 8 percent.
The selling hit Japan, where stocks closed down nearly 8 percent.
Traders in the United States are bracing for a sharp sell-off, judging by prices in the overnight futures market.
Investors sought safety in government bonds. The yield on Germany’s 10-year bond dropped into negative territory. (Bond prices and yields move in opposite directions.)
The yield on the United States 10-year note also sank, to 1.53 percent, after overnight trading that was eight times its normal volume, according to FTN Financial.
The question now is how much more conditions could change in the next days and weeks. At times like this, it makes sense to focus on areas where the global financial system seems most vulnerable.
In Europe, that means searching the markets for indications that investors are starting to bet that the European Union will fracture further.
On that front, the plunges in Europe’s stock markets are hardly reassuring, nor is the weakness in the euro’s exchange rate against the dollar. Particularly important, though, are the prices of government bonds for countries like Italy and Spain, whose economies have struggled in recent years. With a yield of 1.59 percent, Spain’s 10-year bond might not appear to be signaling big trouble ahead. But the difference between Spain’s yield and Germany’s — a closely watched stress indicator — widened on Friday.
Worrying? Sure.
Still, it’s important to remember that the European Central Bank has in the past acted boldly to head off adverse movements in bond markets. And on Friday, it said in a news release that it would “continue to fulfill its responsibilities to ensure price stability and financial stability in the euro area.”
Europe’s other weak point is its banking system. Much of the selling involved Britain’s financial giants. Shares in Barclays, which has large trading operations, and which hoovered up much of Lehman Brothers after it crashed, had shed a fifth of its value on Friday. But Deutsche Bank, Germany’s largest lender, also plummeted — by 14 percent.
At times like this, what really matters is whether banks can raise short-term money to finance their operations. The Bank of England said in a statement on Friday that it would make 250 billion pounds available to banks, and said it could provide “substantial liquidity in foreign currency.”
The financial system overhauls introduced in the United States and Europe since the 2008 crisis, and the willingness to provide emergency support to the banks right now, will most likely stop the financial system from imploding.
But a deeper test is whether the overhaul — which forced banks to have higher levels of capital and retain more liquid cash — has put the banks in a position in which they can continue lending to the real economy during this period of pervasive uncertainty. The Bank of England on Friday underscored that hope in its statement. “This substantial capital and huge liquidity gives banks the flexibility they need to continue to lend to U.K. businesses and households, even during challenging times,” it said.
But this is still theory, just as the bank stress tests conducted by the Federal Reserve, and whose results were announced on Thursday, are theory. Those tests said 33 United States banks would have ample capital left, even after suffering $526 billion in losses in a recession scenario in which unemployment jumped to 10 percent.
One other thing to consider amid this selling and gloom: There is an optimistic scenario. Britain and Europe may work out a peaceful divorce, and Europe’s policy makers may be able to stop the departure from deepening the Continent’s economic problems. The economic pain in Britain may deter other countries from seeking to leave, or they may have votes and decide to stay.
People who have bet on the world ending in recent years have lost a lot of money. But be very open to the notion that Brexit could be the event that finally makes them rich.
Comments
Post a Comment