After the impressive rally last week (fed by hopes of more stimulus measures from central banks), concern about Brexit (Britain's decision to exit the European Union) is now impacting significantly on assets worldwide. With growing fears about instability in the European Union (EU) investors have become "more realistic" and seek safe haven assets, such as government bonds, Japan's yen, the US dollar and gold. A closer look at currencies and yields signals what is going on in investors' minds. Meanwhile, commodity prices - led by crude oil - extended their falls.
Ongoing worldwide market volatility is caused by swinging sentiments between, on the one hand, expectations of more stimulus measures by the Bank of Japan, Bank of England, and European Central Bank (as well as faded expectation of an interest rate hike in the USA), and, on the other hand, "realism" about economic fundamentals, in particularly the fundamentals of Europe. The latest issue that emerged in this continent involves the banking sector of Italy. Shares of Italian banks tumbled, rocking the financial foundations of third-largest economy in the EU. Yesterday, it was reported that Italian lender Banca Monte dei Paschi di Seina received a warning from the ECB for the bank's high level of bad debt.
Meanwhile, Bank of England (BoE) Chairman Mark Carney warned that risks from Brexit have started to crystallize. The BoE reduced capital requirements for banks in an effort to boost lending. It is believed that the BoE warning added negative sentiments to the trading day in Asia as risk aversion was on top of investors' agenda.
The Japanese yen is one of the currencies that strengthened markedly due to the flight to safety. However, this development implies that Japanese stocks are being dumped as a stronger yen curtails the corporate earnings of Japanese exporters. Meanwhile, the strong yen also causes Japan's government bonds to decline. The yield on Japan's 20-year bond went into negative territory, while the yield on the 30-year bond is nearly touching zero.
The British pound sterling is extending its weakening trend against the US dollar in the aftermath of the Brexit vote, touching a more than three-decade low against the greenback due to concern about Britain's economy in the post-Brexit era, concern about unity of the United Kingdom and the lack of a clear political direction in the nation. Meanwhile, Chinese authorities are guiding the yuan to its weakest level since November 2010 with the People's Bank of China setting its daily yuan fixing at 6.6857 per US dollar, securing a competitive advantage for its export products.
The Dow Jones Industrial Average fell 0.6 percent, the Standard & Poor's 500 Index declined 0.7 percent and the Nasdaq Composite was down 0.8 percent on Tuesday (05/07) after US markets were closed on Monday for a public holiday. US assets were also affected by investors' appetite for safe haven assets. As a consequence, US treasury yields hit record lows. Due to the risky environment, investors are eager to invest in super-long sovereign debt, as well as bonds that still offer some yield.
Financial markets in Indonesia, Singapore, Malaysia, and India are closed for public holidays.