U.S. stocks plunge after Britain’s exit vote; bank stocks among hardest hit

Observer Staff and Wire Reports

A board at the Madrid stock exchange reflects the global selloff following Britain’s vote to leave the European Union. U.S. stocks fell sharply in early trading.
A board at the Madrid stock exchange reflects the global selloff following Britain’s vote to leave the European Union. U.S. stocks fell sharply in early trading. AFP/Getty Images

U.S. stocks plunged this morning as the U.K.’s decision to leave the European Union fanned speculation that a divided Europe would put another brake on already fragile global growth.

At 11 a.m., the Dow Jones Industrial Average was down 425 points, or 2.4 percent. The S&P 500 Index was down 55, or 2.6 percent.

Bank of America was down more than 5 percent, and Wells Fargo more than 4 percent.

“U.S. stocks are clearly following the European market,” said Joe Rundle, head of trading at ETX Capital in London, who has been awake all night.

“The risk is that this will trigger a U.K. recession and that will in turn cause a European and global recession. For me, this is as big as 2008 and has the potential to be even bigger,” he told Bloomberg News. “I don’t see the Fed raising interest rates any time soon, at least not this year.”

Bloomberg reported that a plunge of 7 percent in the S&P 500 at any time before 2:30 p.m. in New York will trigger a marketwide circuit breaker that shuts down trading for 15 minutes in an effort to restore order. That would occur if the index slides to 1,965.38, based on Thursday’s close of 2,113.32.

Central banks have sounded the alarm over a potential Brexit, with chiefs of the Federal Reserve, Bank of Japan and Bank of Canada all citing the vote as a potential disruption to the global economy. Fed Chair Janet Yellen said the decision could have consequences for financial markets, and “in turn for the U.S. economic outlook.” The International Monetary Fund had warned that a so-called Brexit risked damage to the U.K. economy.

“Markets appear to be entering a new volatility regime, centered on political risk,” wrote Gina Martin Adams,an equity strategist at Wells Fargo Securities LLC, in a Friday note. “In this environment, policy makers may feel compelled to step up to offer ports in the storm in future days, with hopes of stabilizing asset prices.”

The benchmark U.S. equity gauge could plunge as much as 7 percent in the event of a Brexit, Bank of America Corp. strategists led by Savita Subramanian wrote in a note prior to the referendum. A vote to remain would weaken the dollar and boost crude prices, spurring a 3 percent to 4 percent rally in U.S. stocks,they said.

The vote comes at a time when uncertainty already plagues U.S. stocks, with questions around the Fed’s ability to stoke growth after the worst month for hiring since 2010, a four-quarter decline in corporate profits, price-earnings ratios that are close to a decade high and a presidential election looming in the fall.

The S&P 500 plunged 11 percent in its worst-ever start to a year before recovering through April. It’s virtually been stuck in place since, struggling to hold above the 2,100 level that has capped three rallies since November. It’s poised to tumble from that perch again after closing above it Thursday for the first time in two weeks.

Fallout from the U.K.’s secession vote leaves global investors as reliant on their hedges as any time since the selloff that rocked markets in January and February. Trading of options and derivatives over the last week has risen in instruments that gain in times of market turbulence, among them futures on the CBOE Volatility Index. The measure of turmoil known as the VIX surged 37 percent early Friday to a four-month high.

While investor focus is squarely on the consequences of the Brexit vote, data today added to the flow of disappointing news as orders for U.S. business equipment unexpectedly declined in May by the most in three months. A measure of consumer sentiment is due later this morning.

Bloomberg News contributed.

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