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Report On Business Markets rocked again: How Brexit is impacting business and investing

BREXIT

Markets rocked again

Days after Britons voted to leave the European Union, markets and the corporate world are still reeling. Here's what you need to know

The fallout:

  • Pound plunges to multi-decade low
  • Market bloodbath continues
  • U.K.’s credit rating slashed
  • U.K. bank stocks get crushed
  • Central banks primed to intervene
  • Economic outlook dims
  • Canada’s pension plans eye bargains

How stocks are reacting

Markets got rocked Monday following Friday's selloff that saw roughly $2.1-trillion (U.S.) wiped off the valuation of global stocks in the wake of Britain's vote to leave the European Union.

Canada's benchmark stock index closed down 1.46 per cent, the S&P 500 dropped 1.81 per cent and the Nasdaq composite finished down 2.41 per cent.

The pan-European FTSEurofirst 300 stocks index, which fell 7 per cent on Friday in its biggest plunge in nearly eight years, lost a further 2.9 per cent on Monday, for its biggest two-day fall since the aftermath of the Lehman collapse in 2008. Britain's FTSE 100 index fell 2.1 per cent and Germany's DAX dropped 2.2 per cent.

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Traditional safe havens such as gold have fared well after the referendum result. Bullion rose on Monday, following a 4.8-per-cent surge on Friday, its biggest one-day gain since January of 2009.

“The initial financial market reaction was especially sour mostly because the market had become so convinced that Remain would win, and not so much because it’s a massive negative for the [economic] outlook,” BMO Nesbitt Burns chief economist Douglas Porter said Friday in a report.

-With files from Reuters

More markets coverage from Globe Investor:

U.K. loses last top-notch credit rating

Ratings agency Standard & Poor's stripped Britain of its last remaining top-notch credit rating on Monday, slashing it by two notches from AAA and warning more downgrades could follow after Britons voted to leave the European Union last week.

"In our opinion, this outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the UK," S&P said in a statement, adding it saw a higher risk of Scotland breaking away from the United Kingdom.

S&P had warned that Britain's coveted top-notch credit rating was no longer tenable after last Thursday's referendum result.

Rival ratings agencies Fitch and Moody's stripped Britain of their AAA ratings long before the referendum campaign began. They too have warned of further cuts to their gradings of Britain's creditworthiness.

-Reuters

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U.K. bank stocks get crushed

The U.K.'s largest lenders accelerated the biggest fall since 2009 on Monday after the nation's vote to leave the European Union sparked fears about political and economic risks and the sharpest negative shift in analyst sentiment on record.

Analysts downgraded Barclays PLC, Royal Bank of Scotland Group PLC and Lloyds Banking Group PLC en masse, cutting their earnings outlooks as investors seek to comprehend the fallout from Brexit. The average share-price estimate for these banks dropped more than 13 percent in the past two trading days, while all three lenders had ratings on their stocks cut by at least six analysts.

RBS plummeted as much as 25 per cent in London trading, reaching the lowest levels since January, 2009, after it was bailed out by British taxpayers. Barclays shares were on pace for an even bigger decline than on Friday, falling 19 per cent at 12:56 p.m. in London. Trading in both banks was halted earlier in the day amid the rapid drops.

Lloyds fell 10 per cent, while challenger banks Virgin Money Holdings UK PLC, OneSavings Bank PLC and Shawbrook Group PLC all plunged more than 24 per cent.

-Bloomberg


What this means for the economy

A Brexit would undoubtedly weigh on global growth prospects, though economists are largely pointing at the U.K. as a standout economic loser after the referendum result.


“Once the dust of the knee-jerk market reaction settles, we think that the UK’s economy will clearly be the main victim, but also that the shock for the Euro area and the global economy is likely to be significant,” said Bank of America Merrill Lynch in a note.


Exiting the EU “could cause the U.K. economy to meaningfully underperform, if not tip into recession,” Mr. Porter said in a separate report.


“The U.K. Treasury calculates that GDP will be 3.6% lower in two years than had they remained in the EU, the OECD estimates a 3% loss by 2020, while the IMF warned of a 5.5% loss by 2019.”




More ROB coverage on the economic fallout:




How central banks are reacting

Some of the world's biggest central banks offered financial backstops to soothe plunging markets on Friday after Britain voted to leave the EU, and some intervened in currency markets as they worried that the volatility could hit growth.

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The Bank of England offered to provide more than £ 250-billion ($347-billion) plus "substantial" access to foreign currency to ease any squeeze in markets and Governor Mark Carney said it would consider more measures if needed.

The U.S. Federal Reserve said it was ready to provide dollar liquidity through its existing swap lines with central banks, "as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy."

"The Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks," it added in a statement.

The European Central Bank said it could provide additional liquidity and would protect euro zone financial stability, while the People's Bank of China pledged to keep the yuan basically stable and said it would maintain ample liquidity.

-Reuters

More ROB coverage of central banks:


How currencies are reacting

The British pound tumbled again on Monday, touching its lowest points against the U.S. dollar since 1985. The British currency has dropped 11.2 per cent since Thursday to $1.3211 cents (U.S.).

"Developed market currencies rarely move more than 5% in a day. Double digit moves are very, very rare—even for developing market exchange rates—and large, one-way moves are often followed by modest rebounds at least," said Scotiabank economists in a research note Monday.

Analysis: Why Brexit means a weaker loonie to come Pay attention to the gap between Canadian and U.S. two-year bond yields

"The sharp fall in the [British pound] last week may stifle additional pressure on the [pound] in the short run but we doubt the downside pressure on the pound move has vanished completely."

As of late Monday afternoon, the Canadian dollar is down 0.55 per cent to 76.51 cents (U.S.), following a sizable slide on Friday.


How oil is reacting

Crude prices tumbled nearly 3 per cent on Monday, with Brent hitting seven-week lows, as a rallying dollar and market uncertainty over Britain's shocking vote to exit the European Union threatened to sap more strength from oil's rebound this year.

Brent and U.S. crude have lost almost 8 per cent since Thursday's settlement – the biggest two-day drop in nearly five months – after the so-called Brexit vote sent global risk assets plummeting and safe havens such as the dollar, U.S. Treasuries and gold rallying.

Brent settled down $1.25, or 2.6 per cent, at $47.16 a barrel. It fell to a seven-week low of $46.69 during the session.

U.S. crude fell $1.31, or 2.8 per cent, to settle at $46.33. The intraday low of $45.83 matched a one-month trough hit on June 17.

-Reuters



What this means for Canada

The impact on Canada's economy is expected to be negative, though muted.

The U.K. accounts for 2.5 per cent of Canadian trade, Mr. Porter notes, and 3 per cent of U.S. trade.

"Such small shares and the likely modest impact on total trade suggest the direct risk to the North American economy is minimal," he said.

"We believe that most of the impact of a Brexit on the Canadian economy will come from the uncertainty it generates and its impact on financial conditions and on commodity prices," said Charles St-Arnaud of Nomura Securities in a note.

The vote results should also weigh on interest-rate policy. As uncertainty mounts over global growth prospects, it's now thought central bankers are even less likely to hike interest rates in the immediate future.

Mr. Porter expects the Bank of Canada to "remain on hold" until at least the fourth quarter of 2017, while Mr. St-Arnaud expects the same until at least the end of next year. The Federal Reserve is likewise expected to stand pat for the time being.


What Canadian businesses are saying

BlackBerry: "Like the rest of the world, BlackBerry was monitoring the Brexit outcome and had been evaluating the impact of either a yes or no vote. Despite the yes vote, there are no plans or need to change BlackBerry's operations in the UK."

Royal Bank of Canada: "It is still too early to comment on what our strategy would be in a changed environment, but the UK and Europe are strategically important to RBC and we are committed to the region. We continue to monitor the situation closely."

How Brexit will wash up on Canada's shores Impact will be small but negative, analysts say

Bombardier spokeswoman Haley Dunne: "It is too early to speculate on potential outcomes or impacts of the UK now having voted to leave the European Union. As always, we are committed to our businesses, all our employees and our customers in the UK, and we will continue to work with the Government and other industry stakeholders to create the necessary business environment to ensure our future success."

Stuart Levings, president and CEO of mortgage insurer Genworth MI Canada: "If it boils right down to the mortgage business I don't see it having a massive direct impact. It's more about what are the other knock-on effects that could impact some of the issues that the Canadian housing market is facing as a whole? And the one that comes to mind most obviously is: Will this mean other sources of foreign capital go, 'Wait a minute, there's a whole bunch of instability in the world, let's go to a safe haven like Canada.'"

CGI Group spokesman Lorne Gorber: "With proximity to our clients at the core of CGIs philosophy and strategy, we live and work in dozens of communities across the UK. The impact of this historic decision is varying as we engage directly wth our UK members and clients to ensure we have appropriate support in place as Brexit sets in."


How Canada's pension plans are reacting

Canada's largest pension funds see opportunities to invest in U.K. real estate and infrastructure at discounted prices following Britain's decision to leave the European Union, fund executives said on Friday.

The funds, which manage over $1-trillion ($768-billion U.S.) of assets and are among the biggest investors in U.K. real estate and infrastructure, anticipate valuations falling as a result of Britain's decision to leave the bloc, presenting opportunities for investors willing to take a long-term view.

"The Canadian plans are great investors and I think, as opportunities present themselves, they will take advantage of them. It's at times of dislocation that people often get a really good deal," said Hugh O'Reilly, chief executive at OP Trust, one of Canada's 10 biggest public pension funds.

Canada's large pension funds have differentiated themselves from international rivals by investing directly in infrastructure and real estate as an alternative to choppy equity markets and low-yielding government bonds.

In the U.K., Canadian funds own or have a stake in assets including London City Airport, the High Speed One rail link connecting London to the Channel Tunnel, the country's National Lottery operator Camelot, Scotland's biggest gas network and the ports of Southampton and Grimsby.

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