Surprise Brexit vote impacts equity and currency ETFs

Jun 28th, 2016 | By | Category: Equities

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The result of Thursday’s vote to leave the European Union caught traders off-guard, resulting in a massive sell-off of assets on Friday 24 June 2016. As it became clear that Britain would be leaving the economic bloc it has been part of since 1975, exchange-traded funds tracking major UK, US and European indices suffered significant falls in value, while currency exchange-traded products were also hit.

Surprise Brexit vote impacts equity and currency ETFs

Traders sold off risky assets following the results of the British referendum on independence from the EU which showed the UK will be leaving the economic bloc.

Despite pre-referendum polls suggesting the result was balancing on a knife-edge, investors bet that so-called Brexit would not occur by bidding up stock markets in both Europe and the US. On the day of the referendum, the Stoxx Europe 600 Index rose 1.5%, London’s FTSE 100 Index gained 1.2% and Germany’s DAX climbed 1.8%, marking the fifth consecutive session of gains for all three indices. In the US, the Dow Jones Industrial Average (DJIA) gained 1.3%, the S&P 500 Index rose 1.3%, and the Nasdaq Composite advanced 1.6%.

However, as vote counting continued through the night, it became increasingly clear that investors had misjudged the outcome, with the final results showing a victory for the ‘Leave’ camp of 51.9% to 48.1%.

The immediate fallout from the vote was felt in Asian markets where the MSCI Asia Pacific Index, which tracks a broad range of equities listed across the region, fell 4.1%. Performance was varied by market with the Lyxor Hong Kong UCITS ETF (SIX: HSI), tracking Hong Kong’s Hang Seng Index, losing 2.9%, while the iShares Nikkei 225 UCITS ETF (Xetra: EXX7), tracking Japan’s most widely-quoted equity index, closed down 7.9%. The stock market losses prompted central banks across the region to promise swift action to avert a financial crisis.

In the UK, ETFs such as the iShares Core FTSE 100 UCITS ETF (LSE: ISF) and the Vanguard FTSE 100 UCITS ETF (LSE: VUKE) dropped 6.4% as the UK market opened. The UK’s blue-chip index was sent below 6,000, wiping more than £120bn from the value of its constituents.

In a sign of the market’s concern over the implications of Brexit on the financial sector, Barclays stock value dropped 22% and Lloyds fell 18%. In response, Mark Carney, the governor of the Bank of England, pledged an extra £250bn to the UK’s banks, reassuring investors that a liquidity crisis would not occur. The index did recover steadily through the day to close down 3.2%.

Ratings agency Moody’s lowered the outlook for the UK’s credit rating from stable to negative, citing a prolonged period of political uncertainty and the potential for lower economic growth as justification for the move.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown, said in a statement on Friday: “The Footsie has been bailed out by the Sterling collapse, because all its international revenues streams are now worth that much more in pounds and pence.

“Financials and house builders are bearing the brunt of the pain however, with Lloyds bank being one of the biggest fallers. It’s probably safe to say the public sale of the bank is now firmly in the long grass, and the return to full private ownership of both Lloyds and RBS has been knocked off course.

“It’s also been a bad day to be a mid-cap company – the FTSE 250 Index is suffering to a much greater extent than the blue chip index. Mid-cap companies have sold off harder because they are perceived to be more risky, and tend to be more domestically-focused with fewer overseas earnings.”

The FTSE 250 Index closed down 9.0% on Friday.

European equity markets also felt the impact of Brexit as ETFs with European equity exposures lost value. The iShares STOXX Europe 600 UCITS ETF (Xetra: EXSA) fell 8.6%. Germany’s DAX closed down 6.8%, France’s CAC 40 Index dropped 8.0% and, in Italy, where some banks are thought to be vulnerable, the FTSE MIB Index fell 12.4%, its largest one-day loss on record.

According to Marino Valensise, Head of Multi Asset & Income at Baring Asset Management, Europe’s political agenda may cause a prolonged period of instability on the continent: “The political issues will not be contained to the UK. Europe is likely to struggle, and the success of the UK in exiting the European Union may well lead to a rise of nationalist movements across the continent, each demanding a referendum of their own.

“Next year sees elections in both France and Germany. So it is unlikely that meaningful negotiations can start before 2018, raising the prospect of a long period of uncertainty.”

US equities were also not spared from the sell-off; the iShares Dow Jones Industrial Average UCITS ETF (LSE: CIND) fell 3.4%, and the SPDR S&P 500 UCITS ETF (LSE: SPY5) plunged 3.6%. The iShares Nasdaq 100 UCITS ETF (LSE: CNDX), tracking the tech-heavy Nasdaq Composite, fell 4.1%, highlighting investors’ concerns over future US consumer confidence.

The hit to sterling was also felt in long ETPs against other major currencies. The value of Sterling against the US dollar plummeted 10%, reducing the currency to its lowest level since 1985 at 1.32 $/£. The ETFS 5x Long USD Short GBP ETP (LSE: USP5), which provides five times the daily performance of a long position in the US dollar compared to the British pound, gained 43.6% over the course of the day. The yen, a safe-haven currency in volatile times, soared 6.7% against the dollar. In later trading, the scale of the rise had eased to 3.7%. Over the course of Friday, the pound lost 11.4% against the yen. The euro lost 2.3% against the dollar.

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