So much for George "Panic-Monger" Osborne's calming statement this morning, European banks have collapsed this morning to close down between 20% and 30% since the Brexity vote. The last 2 days plunge in EU banks (down 23%) is the largest in history (double the size of Lehman) and pushes European bank equity market cap to its lowest (in USD terms) ever.
The stock market carnage following Britain’s vote to leave the European Union is the worst on record, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Global equity markets have lost a record $3.01 trillion since Friday’s Brexit results, making it the largest two-day loss to S&P’s Global Broad Market Index, according to Silverblatt.
On Friday, the index shed $2.08 trillion in value the day after the referendum, surpassing the previous one-day record of $1.9 trillion set on Sept. 29, 2008, in the days following the market-roiling collapse of the Lehman Brothers. By the close on Monday, global equity markets shed another $930 billion.
Investors dumped assets perceived as risky and rushed into government bonds, sending yields to record lows. European stocks saw the sharpest drop since the 2008 financial crisis, led by a rout in banking shares. The drop, however, came after a sharp run-up in shares, including a five-day rally by London’s FTSE 100 index UKX, -2.55% and the pan-European Stoxx 600 SXXP, -4.11%
Losses for U.K.-based investors may be amplified by a weaker pound GBPUSD, -0.0151% The sterling has weakened sharply against rival currencies, falling 3.5% against the dollar to trade at $1.319—its lowest level in more than 30 years.
When the general population is asked to define a moment of paradigmatic instability in the history of financial markets, inevitably 2008 - in which there was a unprecedented divergence between risk perception
and the ultimate reality which saw Lehman fail and lead to the near collapse of the financial system - is the most cited answer. However, on Friday various markets saw volatile moves that put 2008 in the dust: in fact, the historic collapse in GBPUSD was not only far greater than any such move seen in history, but was an unprecedented 12-sigma move.
As Bank of America notes, post Britain’s vote to Leave the EU, the Euro STOXX 50 experienced its largest ever 1-day loss, GBPUSD reached 30yr lows and EURJPY, EURUSD & 10yr Bunds experienced 1d moves that were more significant than on any day in 2008. Gaps in risk perception that were evident even as recently as last week (VSTOXX-VIX spread was as wide as 20pts), may narrow further as spillover risk to global assets remains high. Indeed the Critical Stress Indicator of BofAML’s GFSITM index triggered on 13-Jun, suggesting cross asset stresses had risen by enough to lead to widespread contagion, absent policy intervention.
On Friday afternoon, after the shocking Brexit referendum, while being interviewed by CNBC Alan Greenspan stunned his hosts when he said that things are about as bad as he has ever seen.
"This is the worst period, I recall since I've been in public service. There's nothing like it, including the crisis — remember October 19th, 1987, when the Dow went down by a record amount 23 percent? That I thought was the bottom of all potential problems. This has a corrosive effect that will not go away. I'd love to find something positive to say."
Strangely enough, he was not refering to the British exodus but to America's own economic troubles.
Today, Greenspan was on Bloomberg Surveillance where in an extensive, 30 minutes interview he was urged to give his take on the British referendum outcome. According to Greenspan, David Cameron miscalculated and made a “terrible mistake” in holding a referendum. That decision led to a “terrible outcome in all respects,” Greenspan said. "It didn’t have to happen.” Greenspan then noted that as a result of Brexit, "we are in very early days a crisis which has got a way to go", and point to Scotland which he said will likely have another referendum on its own, predicting the vote would be successful, and Northern Ireland would “probably” go the same way.
His remarks then centered on the Eurozone which he defined as a truly “vulnerable institution,” primarily due to Greece’s inclusion in its structure. “Get Greece out. They’re a toxic liability sitting in the middle of a very important economic zone." Ironically, the same Eurozone has spent countless hours doing everything in its power to show just how unbreakable the union is by preserving Greece, while it took the UK just one overnight session to break away. Luckily the UK was not part of the monetary union or else it would be game over.
Greenspan warned that fundamentally it is not so much an issue of immigration, or even economics, but unsustainable welfare spending, or as Greenspan puts it, "entitlements."
The issue is essentially that entitlements are legal issues. They have nothing to do with economics. You reach a certain age or you are ill or something of that nature and you are entitled to certain expenditures out of the budget without any reference to how it's going to be funded. Where the productivity levels are now, we are lucky to get something even close to two percent annual growth rate. That annual growth rate of two percent is not adequate to finance the existing needs.
I don't know how it's going to resolve, but there's going to be a crisis.
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