Sterling and equities continued to slide today while safe havens assets such as gold and government bonds gained popularity as investors continue to feel the hit of last week’s Brexit vote.
The UK currency slipped 2 per cent against the dollar to $1.3397 as the political turmoil following the vote to Brexit adds to market uncertainty.
Last Friday, when 51.9 per cent of UK citizens decided to leave the European Union, sterling fell to $1.3232, marking its lowest point in 30 years. It then rebounded to $1.3659 during the morning.
Today the FTSE 100 was down 1.2 per cent at market opening, compared to last Friday’s plunge of 8.2 per cent, while the FTSE 250, which fell 7.2 per cent on Friday, is now down another 3.2 per cent.
Julius Baer economist David Meier says: “The pound will continue to suffer after the initial shock we witnessed last Friday, as fundamentals will turn against it. In particular, the meltdown of foreign direct investments is a longer-term threat for the GBP.”
Julius Baer predicts a 1.4 per cent real GDP growth for 2016, but only sees a 0.7 per cent growth for 2017.
Meier says: “Economic growth is likely to be wiped out in the second half of this year, as uncertainty will weigh strongly on investments and hiring, even if trade relations hold throughout the lengthy political process the Brexit provokes, which could last several years.”
Elsewhere around the globe, early indications show the US S&P 500 is likely to drop 0.5 per cent when markets open, while the Hong Kong Hang Seng has fallen 0.7 per cent.
However other Asian markets are faring better, with Japan’s Nikkei rising 1.6 per cent today compared to a 7.9 per cent loss on Friday, its biggest since the 2008 financial crisis.
The Shanghai Composite also gained 0.6 per cent to 2,870.92 and Sydney’s S&P-ASX 200 was up 0.5 per cent to 5,136.80.
The price of gold has continued on last week’s rise, increasing 0.7 per cent at $1,325 an ounce after hitting $1,35 late last week, its highest level in two years.
Meanwhile, the yield on 10-year gilts dropped 13 basis points to 0.95 per cent, another signal of investors moving into safe havens.
Meir says: “Gold should continue trading with market sentiment and benefit from rising risk aversion and suffering from falling risk aversion. In the short term, prices could rise towards $1,400 per ounce, which has been our bullish scenario for some time.
“Unless wider economic and financial market consequences materialise high prices are unlikely to last. History has shown that political events usually do not have a lasting impact on gold but cause short-term deviations from longer-term trends.”