By Riva Gold and Aaron Kuriloff
The aftershocks of the U.K.'s vote to leave the European Union
continued to ripple through financial markets Monday, deepening a
rout in bank shares and sending the British pound to a three-decade
low.
The Dow Jones Industrial Average declined 307 points, or 1.8%,
while the S&P 500 dropped 2.1% and the Nasdaq Composite fell
2.6%.
The Stoxx Europe 600 slid 4.1%, on track for its lowest close
since February, even as policymakers rushed to reassure investors
that the economy will remain resilient.
Following the surprise U.K. referendum result, "everyone's very
worst fear of what might happen five years from now is instantly
brought forward" in the stock market, said Jim Paulsen, chief
investment strategist at Wells Capital Management.
Strategists at Bank of America Merrill Lynch warned Monday that
"Brexit is an exogenous shock" that will lead to lower growth,
lower rates and a stronger dollar. While the long-term political
and economic repercussions of the result remain to be seen,
economists and investors have already slashed their near-term
forecasts for U.K. and eurozone growth in anticipation of a
prolonged period of political and economic uncertainty.
Investors face a range of question marks following the vote,
including the makeup of Britain's political leadership, the
country's future relationship with the EU, the long-term impact on
business confidence and investment in Europe, and the response it
will prompt from policy makers and politicians around the
world.
"There are just so many moving bits...it's a highly uncertain
future," said Mark Harris, head of multiasset at City Financial in
London. "To say that I'm stunned is an understatement," he
added.
Bank shares led declines Monday amid concerns that the U.K.'s
exit could put lenders operating in the region at risk and prolong
a period of ultralow interest rates on both sides of the
Atlantic.
Financial shares in the S&P 500 fell 3.1%, leading declines
in the broader index, while the Stoxx 600 Banks index fell 7.8%, on
track for its lowest close since 2012.
Shares of Royal Bank of Scotland Group PLC and Barclays PLC
declined more than 16%, while Lloyds Banking Group PLC lost roughly
9.5%.
European travel shares also declined sharply, with easyJet PLC
falling 23% after the company warned on profit following the
referendum.
On Monday, shares of U.S. utilities and telecom companies, which
are often used as a proxy for bonds, advanced, alone in a sea of
red. Investors have poured into the relative safety of such
dividend paying shares, sending utility shares up 17% in 2016.
Some traders and investors said U.S. investors were still
sorting out the ramifications of the June 23 vote, at a time when
stock valuations had already appeared stretched amid persistent
concerns about slow economic growth.
In the U.K., the FTSE 250 Index fell another 6.6%, on track for
its lowest close since 2014, while 10-year U.K. government bond
yields fell below 1% for the first time on record, according to
data from Tradeweb.
The yield on the 10-year U.S. Treasury fell to 1.480%. Yields
move inversely to prices.
In currencies, the British pound fell 3.6% against the dollar to
as low as $1.3121, its lowest since 1985, even after British
Chancellor of the Exchequer George Osborne issued a statement
reassuring investors that the U.K. economy remained resilient and
its banks and financial system were healthy.
The euro fell 1.2% against the dollar to $1.0981, while the
dollar fell 0.5% against the yen to Yen101.6760.
"Brexit is an event which will have long-lasting adverse
repercussions for the markets, in particular for the eurozone,"
said strategists at J.P. Morgan Cazenove in a note Monday.
Still, the impact on global growth is likely to be more limited,
many strategists say, with the greatest impact limited to U.K.
assets. "Today's market reaction suggests that Brexit could be more
a local rather than globally systemic event," said Mike Amey, a
portfolio manager at Pimco in a note.
Others said the shock to risk appetite could prove temporary,
particularly if central banks can step in.
U.S. stocks have yet to retrace their lows for the year, while
expectations for the Federal Reserve to raise interest rates this
year have already fallen sharply following the U.K. vote.
Last week's rally ahead of the results intensified the pace of
the declines, said Bruce Bittles, chief investment strategist at
Robert W. Baird & Co. But despite worries about valuations and
the impact of a strengthening dollar on exporters' profits, low
yields in the bond market leave few alternatives for investors
outside of equities.
"Stocks don't have much competition," he said. "Very low rates,
very low inflation and a friendly monetary policy backdrop is going
to drive the market."
Earlier, officials helped stoke a modest rebound in Asia
following heavy losses on Friday. The Nikkei Stock Average gained
2.4% after an adviser to Prime Minister Shinzo Abe said Monday that
Japan now has a "little more ground" to rationalize intervening in
the currency markets.
The Shanghai Composite Index added 1.5% after the People's Bank
of China weakened the yuan by the most since August, while shares
in Hong Kong edged down 0.2%.
In commodities, U.S. crude oil fell 2.1% to $46.64 a barrel,
while gold rose 0.4% to $1,327 an ounce, following its biggest
one-day gain since 2013.
Amid the broad-based losses in Europe, Spain's IBEX 35 fell just
1% after Prime Minister Mariano Rajoy's Popular Party did better
than expected in national elections Sunday.
Stephen Fidler
and Jason Douglas contributed to this article.
Write to Riva Gold at riva.gold@wsj.com
(END) Dow Jones Newswires
June 27, 2016 11:33 ET (15:33 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.