Markets Rebound From Brexit Routs as European Stocks rise

The pound, European stocks and commodities were all headed for their first gains since Britain’s shock vote to leave the European Union, while Asian shares erased losses amid signs policy makers are taking steps to limit any economic fallout.

Sterling and the Stoxx Europe 600 Index both rebounded after tumbling 11 percent in the last two trading sessions. A gauge of the greenback’s strength snapped its steepest rally since 2011. The Bloomberg Commodity Index climbed from a three-week low as oil rose to about $47 a barrel and industrial metals rose. Sovereign bond yields plumbed new lows in Australia, Japan and South Korea as futures indicated that the next move in U.S. interest rates is now likely to be a cut.

“We are probably going to have looser policy settings than before the vote,” Tim Schroeders, a Melbourne-based portfolio manager at Pengana Capital Ltd., who helps oversee about $1.2 billion in assets, said by phone. “You’d have to suspect that the bias is to the downside for global growth and as a result that stimulus remains in light of increased uncertainty.”

Britain’s vote to secede from the EU wiped almost $4 trillion off the value of global equities, with investors selling riskier assets amid concern trade snarls and political upheaval would disrupt the already-fragile global economic recovery. Fed Funds futures indicate there is now a 9 percent chance the Federal Reserve will raise interest rates by February and a 20 percent likelihood of a cut. Prior to the U.K.’s referendum, there was zero prospect of a reduction and a 52 percent probability of an increase.

EU leaders will gather in Brussels on Tuesday for the start of a two-day European Council summit to discuss Britain’s decision to leave the bloc. U.S. data are forecast to show that consumer confidence held close to a six-month low this month, while China’s central bank Governor Zhou Xiaochuan is due to speak at a forum being hosted by the European Central Bank. Bank of England Governor Mark Carney is scheduled to chair a meeting of financial stability officials.

Currencies

The pound strengthened 0.4 percent versus the dollar as of 8:15 a.m. London time, supported by technical indicators that suggested the record two-day loss since Thursday’s vote was excessive. The move comes even after the U.K. was stripped of its top credit grade by S&P Global Ratings, and Fitch Ratings also lowered the country’s rank.

The yen weakened 0.1 percent, after surging more than 4 percent over the last two sessions. The Bloomberg Dollar Spot Index retreated 0.4 percent, following a two-day jump of 2.7 percent.

“After such huge market swings since Friday, currencies are undergoing a bear market rebound and the dollar is part of that move,” said Masafumi Yamamoto, chief currency strategist in Tokyo at Mizuho Securities Co. “This is just temporary as markets are still facing the aftershocks of the Brexit outcome. There is no additional information on what will happen, so there’s no change in the fundamental situation.”

The currencies of commodity-exporting nations rallied, with the Australian and New Zealand dollars gaining at least 0.9 percent versus the greenback and South Africa’s rand climbing 1.6 percent. South Korea’s won appreciated 1 percent as most emerging-market currencies strengthened.

Stocks

The Stoxx Europe 600 Index jumped 2.3 percent and the U.K.’s FTSE 100 Index surged 2.1 percent. S&P 500 futures rallied 1 percent.

The MSCI Asia Pacific Index was little changed, after earlier sliding as much as 1.2 percent. A $17 billion fiscal stimulus package boosted shares in South Korea, while shares in Japan were buoyed by a Nikkei newspaper report saying a 20 trillion yen ($196 billion) stimulus proposal has been submitted to Prime Minister Shinzo Abe by a senior official in his party.

Commodities

The Bloomberg Commodity Index gained 0.9 percent. Crude oil added 1.9 percent to trade at $47.18 a barrel in New York, while copper, nickel and zinc rose more than 1 percent London.

Gold slipped 0.7 percent, after jumping 5.4 percent in the last two sessions, its steepest rally since January 2009.

“Those sorts of spikes tend to be followed by a form of retracement, and that’s what were seeing,” David Lennox, resource analyst at Fat Prophets, said from Sydney. “We’re not saying that the uncertainty and the safe-haven aspect of Britain pulling out of the EU is over yet. So there’s still going to be some potentially good upside for gold.”

Bonds

The yield on Bank of America Corp.’s Global Broad Market Index fell to 1.11 percent, a level not seen before in data going back to 1996, and Japan’s benchmarks all dipped below 0.1 percent for the first time as the 40-year rate slipped to an unprecedented 0.065 percent.

Australia’s and South Korea’s 10-year yields dropped to all-time lows, while that on U.S. Treasuries increased by one basis point to 1.45 percent. It was 1.75 percent ahead of the U.K.’s referendum results and Scott Minerd, chief investment officer for Guggenheim Partners, sees yields on the securities plunging to 1 percent by the end of the year.

“Global yields will decline gradually,” said Hideaki Kuriki, a debt investor at Sumitomo Mitsui Trust Asset Management, which oversees $80.4 billion in Tokyo. “The world economy will get worse. The Fed cannot hike.”

Spanish and Italian bonds rallied for a second day. Spain’s yield dropped six basis points to 1.39 percent, after an 18 basis point slide on Monday that marked its steepest decrease in two years. The yield on similar-maturity Italian notes declined by five basis points to 1.45 percent.

Source: Bloomberg