U.S. stocks tumble after Britain votes to leave the EU
U.S. stocks tumbled the most since January, joining a sell-off in global risk assets on speculation that the U.K. decision to leave the European Union will hamper worldwide growth.
Equities sank to session lows in afternoon trading, with the Dow Jones industrial average sliding more than 550 points. The S&P 500 Index extended losses after falling below the 2,050 level, an area where other pullbacks during the prior two months found a floor. Banks and industrial shares were on the way to their worst single-day declines in more than four years.
“Market participants are right to be concerned,” said Dean Maki, chief economist of investment firm Point72 Asset Management. “This is a legitimate risk-off event. We're likely to see weaker growth as a result of this, and it's appropriate that markets are reacting to this. Exports are likely to be weaker and earnings are a function of exports. U.S. exporters are going to have to deal with a stronger dollar again.”
The S&P 500 Index fell 3.2 percent to 2,045.32 at 2:29 p.m. in New York, the most in five months. The Dow dropped 559.09 points, or 3.1 percent, to 17,451.98, also the biggest retreat since January. Trading volume in S&P 500 shares was more than 75 percent above the 30-day average for this time of day.
The victory of the “Leave” campaign stunned many investors who'd put wagers on riskier assets over the past week as bookmakers' odds suggested the chance of a so-called Brexit was less than one in four. The pound plunged the most in 30 years and European equities dropped as investors weighed the implications for the global economy.
The day's turbulence was accompanied by a chorus of central-bank assurances that policymakers stand ready to intervene. Governor Mark Carney said the Bank of England could pump billions of pounds into the financial system, while the European Central Bank said it will give banks all the funding they require to counter market turmoil. The Federal Reserve said it was “carefully monitoring” financial markets.
As if results of the U.K. vote wasn't enough, today is also the date of the annual rebalancing of FTSE Russell's stock indexes, a procedure that reliably exacerbates trading. In 2015, the reconstitution helped fuel a jump in volume to more than 10 billion shares, the seventh-highest total of the year.
Overnight, stock futures on the benchmark fell far enough to reach trading curbs that blocked further losses. Declines Friday also came after markets had rallied during the past week on optimism the U.K. would vote to remain in the EU, with the S&P 500 rising 1.7 percent in four sessions.
Banks Battered
Banks plunged after rallying the most in five weeks Thursday, with Citigroup Inc. down 8.8 percent, the most in 10 months. JPMorgan Chase & Co. and Goldman Sachs Group Inc. lost more than 6.3 percent. Caterpillar Inc. and Boeing Co. sank at least 5 percent after pacing the Dow's biggest gain in three months Thursday. Energy shares fell 3.3 percent as crude decreased more than 4 percent.
“Fundamentally, this probably doesn't impact many U.S. companies that aren't invested in the U.K., though it impacts sectors like financials because it looks like there won't be a Fed rate hike for a little bit longer, though even they don't really know,” said Tim Ghriskey, who oversees $1.5 billion as managing director and chief investment officer at Solaris Asset Management.
Traders abandoned bets on future interest-rate increases well into 2017, after expectations for higher borrowing costs this year had crept up yesterday on optimism the U.K. would remain in the EU. Odds of a Fed move by February plunged to 16 percent from 52 percent Thursday, while probability of an actual rate cut before the December meeting rose to almost 12 percent.
In Friday's session, nine of the S&P 500's 10 main industries slid, with financials reversing their strongest climb since April with the biggest drop in four years, on a closing basis. Seven groups sank at least 2.4 percent, with industrials on track for the worst one-day drop since 2011 and raw-materials on the way to the biggest slide since the August swoon. Utilities rose 0.5 percent.
Automakers Slide
Ford Motor Co. lost 6.5 percent, on pace for the most since September 2014, after saying the Brexit will have an “adverse impact” on its operations. Parts makers Delphi Automotive Plc and BorgWarner Inc. slumped more than 9.7 percent. General Motors Co. slid 4.7 percent toward a four-month low.
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.
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 fell 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 sell-off 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 jumped 39 percent Friday, the most since August.
—With assistance from Bailey Lipschultz, Joseph Ciolli, Carolynn Look, Oliver Renick, Lu Wang and Anna-Louise Jackson.
To contact the reporters on this story: Dani Burger in New York at dburger7bloomberg.net; Eric Lam in Toronto at elam87bloomberg.net To contact the editors responsible for this story: Jeremy Herron at jherron8bloomberg.net John Shipman