BREXIT jolts Global Economy

World markets slumped in Europe, America and Asia due to Brexit vote pushed UK into recession. Wall Street suffers biggest fall in 10 months. The closing bell has rung on Wall Street, leaving shares deep in the red. The Dow Jones index has slumped by 608 points, or nearly 3.4%, at 17,402. Almost every share lost ground, with financial stocks worst hit.
With the uncertain future following the UK vote to leave the European Union, and an 8% fall in sterling against the dollar, investors sold off shares, with banks, housebuilders and airlines hard hit, but gold and silver miners in demand.
Markets came off some of their worst levels, however, as central banks from the Bank of England to the Fed queued up to reassure that they would provide any liquidity that was needed. And the FTSE 100 outperformed European peers, with exporters in particular helped by the fall in the pound. In fact the UK index, down 3.15% on the day, is actually up 1.95% on the week, benefitting from its earlier gains when it appeared the Remain camp would win the day.
Shares in Britain’s house builders slumped by more than a quarter today, as investors anticipated that the UK economy could be dragged into recession. Taylor Wimpey, Persimmon, and Barratt – three big UK building firms – were the worst-performing major companies in London. Banking stocks, which also track Britain’s economic prospects – and fears of another financial crisis – also suffered heavy losses. The biggest fallers on the blue-chip FTSE 100 inded helped to drag ti down by 199 points or 3.15%.
Some shares rallied though. Gold miner Randgold, and silver maker Fresnillo, both rallied – matching the jump in precious metals prices. And companies who trade with international markets, such as smartphone chip maker ARM and pharmaceutical firm AstraZeneca, also rose.
Moody’s cuts outlook on UK debt to negative. Moody’s, the credit rating agency, has just lowered the outlook on Britain’s credit rating to negative from stable. It says that Britain’s economic growth will be weaker, following the EU referendum vote. It also warns the public finances will be weaker than previously forecast, meaning it will be harder to cut the deficit.
Moody’s says that the Brexit vote will herald a “prolonged period of uncertainty” for the UK, with negative implications for growth in the medium terms. And it also warns that the effectiveness of economic policymaking could be ‘somewhat diminished’ by the decision. A negative outlook means there is a greater danger of a country being downgraded.
However, Bank of England promises £250bn to calm markets. Bank of England governor Mark Carney says there will inevitably be a period of uncertainty following the decision to leave the European Union. But there will be no immediate change to our relationship with the EU.
It will take some times for the UK to establish new relationships with the rest of the world. So some market and economic volatility can be expected, but we are well prepared for this, says Carney. He says he has been in close contact with chancellor George Osborne through the night, and this morning.
UK banks are more resilient than before the 2008 crisis, Carney says, and are forced to carry 10 times as much capital. The Bank of England will not hesitate to take additional measures as required to address any market volatility, says the governor. And Carney says the BOE will make £250bn of additional funds available through its normal market operations to stability markets, as needed.
Pakistan shares market was undergoing correction after the JSCI upgrade gala. The prevalence of unexpected “Leave” vote in UK’s historic referendum on June 23 led to what analysts said bloodbath at Pakistan Stock Exchange (PSX) on the week’s last trading day.
The Benchmark KSE-100 index devalued by 2.2% or 848 points on the day with its week-on-week (WoW) losses settling at 3.6 percent. The market-capital-weighted index ended the week at 37,389 after ebbing to the session low 36,825 points.
The market remained in the correction mode throughout the week as the MSCI euphoria fizzled out with Brexit jitters diverting attention towards global financial markets. The global markets crashed as Britain’s unprecedented vote to leave the European Union rocked the financial markets world over.
Foreign investors also appeared jittery to have made net selling of $21 million WoW. With chemicals and cements losing the most, $6.8 million and $5.5 million ouf lows, the banking stocks attracted $1.3 million investment.
Tobacco and refinery sectors were among the gainers this week as they rose 8.1 percent and 2.2 %. The losers list was topped by automobile assemblers, oil and gas exploration and textile companies, mainly because of Brexit’s impact. The sectors fell in the range of 2.2-4.4% this week.
Besides one third foreign holding in free float, investors were concerned that Pakistan exports to UK would be affected after Brexit, viewed Topline analysts. All this culminated into broad based selling at PSX with the KSE index falling by 2.2% in a single day.
The response was greater in sectors like autos (importers from Japan), textiles (exporters to Britain and EU) and oil (decline in oil prices) as they remain direct affectees of this development.
Other important highlights of the week were SNGPL and SSGC’s announcement to spend Rs71 billion to upgrade gas network, heavy monsoon rain expected to start from next week – a negative for cements and fertilisers and 7.34% decline in textile exports YoY in 11MFY16.


Arshad Chaudhary

Author is an editor of Melange International

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