Stocks extended their losses from late last week when Britain’s unexpected vote to leave the European Union cratered global markets.
The pound also fell further against the dollar.
First, the scoreboard:
- Dow: 17,140.65, -260.10, (-1.49%)
- S&P 500: 2,001.07, -36.34, (-1.78%)
- Nasdaq: 4,596.22, -111.76, (-2.37%)
- WTI crude oil: $46.33, -$1.31 (-2.75%)
- US 10-year yield: 1.461% (-0.118)
- S&P downgraded the UK’s credit rating from “AAA” to “AA”: Because of Brexit, the UK has lost the rating agency’s top designation, and now has a “negative” outlook. Brexit “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. While AA is still a solid rating, this action indicates that S&P is less confident in the UK’s ability to repay its sovereign debt following the Brexit vote. Over the weekend, several analysts warned about the risk of an outright recession hitting the country, with Goldman Sachs analysts forecasting one next year. On Friday, Moody’s lowered its outlook on the UK’s credit rating to “negative” from “stable.”
- Narayana Kocherlakota says the Federal Reserve should cut rates because of Brexit. “Given the prospect of shocks that are hard to offset, the Fed should be easing monetary policy to make the U.S. economy as healthy as possible,” the former Minneapolis Fed president wrote in a Bloomberg View column. A steadfast Fed dove, Kocherlakota urged the Fed earlier this year to cut rates into negative territory.
- The Chinese yuan fell to a six-year low against the dollar. In response to Brexit, the People’s Bank of China weakened the currency’s reference rate per dollar by 0.9% to 6.6375, the steepest devaluation since August. As Business Insider’s Linette Lopez wrote, a weak yuan could start a wave of outflows that echo those seen after the big devaluation in August 2015, as investors look for safe havens. Barclays thinks the yuan could fall another 10% against the dollar before all this volatility is over.
- Brexit is going to do some serious damage on Wall Street. Goldman Sachs’ Richard Ramsden and team ran a “stress test” on bank earnings, based on a scenario in which there are no additional Fed fund hikes, and 1% five-year yields and 1.75% 10-year yields at the end of 2017, which is what the futures market was pricing in at the end of Friday. The team also assumed a 20% year-on-year decline in capital-markets revenues, a 20% drop in stocks, and a downshift in mergers and acquisitions. Under that scenario, bank earnings could drop by more than 10%, while mergers-and-acquisitions advisers could see a near 30% drop.
- Brexit is bad news for airlines. A report from the International Air Transport Association showed the number of passengers travelling to the UK is expected to fall by 3% to 5% in the next four years. Freight shipments leaving the UK are also expected to fall. And while the regulatory environment will necessarily change, it’s uncertain if this will be positive or negative for Britain, according to IATA. Airlines lost big on Friday; American Airlines tanked 10.8%, United tumbled 9.1%, and Delta slid 8.1%. Meanwhile, British Airways started a 3-day sale. “Your dollar has never gone further,” said a promoted tweet.
- In US economic data, Markit’s flash services purchasing manager’s index for June showed that growth in the all-important sector is still subdued. The index held steady at 51.3, below economists’ consensus expectation for 51.9. Markit’s survey of service providers – who contribute to two-thirds of economic activity – showed that their business optimism fell to a survey-record low. And, the Dallas Fed’s manufacturing index fell to -18.3 in June, more than expected. The report showed that there was some improvement, although production remained in contraction, and the headline activity index has been negative since December 2014. The gauge of employment tanked to its lowest level since 2009.
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