UKX FTSE 100 Index

By Riva Gold 

Global stocks were steady at the start of the third quarter while government bond yields touched record lows amid expectations that central banks would remain supportive following the U.K.'s vote to exit the European Union.

The yield on 10-year U.S. Treasury notes fell to 1.385% during European morning trade, briefly breaking below its previous intraday record of 1.389% hit on July 24, 2012, according to TradeWeb. 10-year U.K. gilt yields touched a new low of 0.783% as investors continued to shift their expectations for interest rates.

All of Swiss government debt is currently negative-yielding, according to data from Tradeweb. Yields move inversely to prices.

The demand for safe government debt underscores nervousness among investors despite the recent recovery in stock markets. Particularly in the U.K. and across Europe, many investors say longer-term Brexit-related risks remain, including weakness in European banks. The Stoxx Europe 600 Banks Index is still down over 3% from before the U.K. vote.

Futures markets pointed to a flat open for the S&P 500 ahead of a long weekend, following its steepest three-day rally since February.

The Stoxx Europe 600 was up 0.9% as the auto sector jumped, building on the pan-European index's largest three-day percentage gain since November 2011. London's export-oriented FTSE 100 index, whose revenues are largely derived from outside the U.K., rose 1.2%, on track for its best week since 2010.

"Most countries are going on business as usual," said Peter Marber, head of emerging markets at Boston-based fund Loomis Sayles & Co. "People have already begun to forget about Brexit," he said.

Markets had sold off sharply Friday and Monday in the immediate aftermath of the referendum result, triggering the greatest week of equity outflows since August, according to Bank of America Merrill Lynch. But many stocks have rebounded sharply since Tuesday amid hopes that central banks around the world would help shore up liquidity and keep monetary policy loose.

Bank of England Gov. Mark Carney signaled Thursday that further interest-rate cuts will be needed after the Brexit vote, while news reports that the European Central Bank was considering a change to its bond-purchase program helped support prices on Spanish and Italian bonds.

London's FTSE 250, which is geared toward the U.K. economy, has felt more of the pressure, amid concerns the Brexit vote will trigger a period of lower business investment and consumption that could hinder growth.

"It's way too early to assume simply because equity markets have rebounded somewhat that there's nothing to worry about," said Abi Oladimeji, chief strategist at Thomas Miller Investment in London. The epicenter of the fallout will be in the U.K. and Europe, he said, which are likely to face the greatest economic, financial markets and political repercussions.

The U.K. must now select a new prime minister, while negotiations with the EU are expected to begin in the coming months.

S&P Global Ratings cut the investment-grade credit rating of the European Union on Thursday, saying the U.K.'s vote reduces its budget flexibility and reflects a loss of political solidarity. The ECB's top economist warned Friday that a Brexit could reverse recent improvements in the euro-area economy.

The U.S. holds a presidential election in the fall, leaving no shortage of political events to drive markets.

Heading into the second half of the year, "it seems quite obvious to me that political risk will dominate for a while longer," Mr. Oladimeji said.

In currencies, the pound was down 0.3% against the dollar at $1.3307. The euro gained 0.2% against the dollar to $1.1132, while the dollar fell 0.5% against the yen to Yen102.6430.

Asian markets largely advanced as a strong close on Wall Street and in Europe rippled overseas. Japan's Nikkei Stock Average added 0.7%, while shares in Australia added 0.3%.

Stocks in Shanghai inched up just 0.1% after two gauges of Chinese manufacturing activity weakened Friday, suggesting second-quarter growth may be slower than the first. Still, the services sector improved, reassuring some investors about the health of the world's second-largest economy. Markets in Hong Kong were closed.

In commodities, gold gained 1.2% to $1,336 an ounce. Brent crude oil fell 0.1% to $49.64 a barrel.

--Christopher Whittall, Tom Fairless and Tess Stynes contributed to this article

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

July 01, 2016 09:08 ET (13:08 GMT)

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