Risk assets took another pounding overnight as the UK decision to leave the EU continues to rock financial markets. Equity markets on both sides of the Atlantic ended the day sharply lower, the British Pound fell another 3.6% and demand for safe haven assets boosted gold and dragged core global yields lower.

UK Markets have continued to drive global sentiment. The prospects of weaker growth, regulatory and political uncertainty along with low interest rates have been noted as the major reasons for the selling of financial shares across Europe and Wall Street. Airlines and home builders have also taken a beating while utilities, healthcare and telcos had mixed results.

Adding salt to the wound, England has just lots to Iceland and they are out of Europe for a second time in less than a week. In addition, S&P stripped the UK from its AAA rating, cutting the countries debt by two notches with negative outlook. The rating agency noted that the UK decision to leave the EU threatens the country’s constitutional and economic integrity and it said that leaving the Union would “lead to a less predictable, stable and effective policy framework in the UK”. S&P was the last of the three big rating agencies to strip the UK from its triple A rating. Moody’s rating for the UK is Aa1 with negative outlook and Fitch Ratings has the UK at an equivalent double-A-plus.

The lack of UK political leadership at a time of market disarray is doing little to reassure markets. On this point, there was little market reaction to news that the UK Conservative Party has brought the date forward to elect a new leader by almost a month to 2 September. Instead as yet another blow to the UK, German, French and Italian leaders have confirmed that they will not hold informal talks with the UK until it triggers article 50 to leave.

Looking at currencies, while the USD and JPY have retained their safe haven status, the lack of clarity on the future relationship between the UK and Europe suggests that the GBP adjustment still has more to go. The NZD and AUD have also underperformed (down 1.74% and 1.66% respectively) and notably the NZD is now struggling to stay above the 70c mark. The Euro loss 1% against the USD and JPY/USD is unchanged. Speculation of potential currency intervention by the BoJ has probably played a factor on the subdued performance of the Yen relative to the USD.

Amid the turmoil in risk assets core global yields were well supported overnight. 10y UK gilts moved sub the 1% mark for the first time in history, after dropping 15bps to end the day at 0.931%. Both German and Japan 10-year rates fell further into negative territory, closing at minus 0.12% and minus 0.21% respectively and in the US, the Treasury curve flattened with the move led by the back end of the curve. 10y UST are currently trading at 1.439%, 7bps lower relative to Sydney’s closing level.

In commodities, oil prices are about 2% lower, gold is up 0.8%, copper is unchanged and somewhat surprisingly, iron ore had a pretty solid night, jumping 6.4% to $53.9.

As for data releases, the US trade deficit rose in May to $60.6bn from $57.5bn, marginally worse than the $59.5bn expected by consensus.

Coming Up

Markets’ remain sensitive to Brexit headlines and in a day devoid of major data releases, the two day EU Leaders summit commencing later today has the potential to be a weighty source of market volatility. If recent headlines are any guide, some leaders will no doubt take the opportunity to remind the UK that exit negotiations will be tough. Others are likely to urge the UK for a quick ‘divorce’ while the message of unity within the union is also likely to be touted. All that said, hopefully we also get some detail on what steps the EU plans to take in order minimize the negative ramifications  from Brexit, both in terms of its economic as well socio-political impact. Let’s see…

In Australia this morning we get the weekly consumer confidence reading. Last week the index reached a new 2 year high and it would be interesting to see if this level of confidence is maintained ahead of the Australian Federal election on Saturday.

In offshore markets it’s all about US data releases.  The third Q1 GDP estimate is expected to show an upward revision to 1% from 0.8% and the June Consumer confidence reading is anticipated to come at 93.4, almost a full point higher from its previous month print. The Case-Shiller Home Prices (April) are also due out along with the June Richmond Fed Manufacturing index.

Overnight

On global stock markets, the S&P 500 was -1.81%. Bond markets saw US 10-years -12.22bp to 1.44%. In commodities, Brent crude oil -1.82% to $47.53, gold+0.8% to $1,327, iron ore +6.4% to $53.86. AUD is at 0.7332 and the range since yesterday 5pm Sydney time is 0.7327 to 0.7448.

Good luck.

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