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U.S. stocks resume selloff as 'Brexit' angst continues

June 27, 2016

U.S. stocks on Monday resumed a selloff sparked by Britain’s shock vote to leave the European Union, with the Dow Jones industrial average falling down more than 250 points after equities on Friday tumbled the most in 10 months.

Banks remained the focal point in the downdraft, with no sign of the pummeling letting up after lenders on Friday saw the worst one-day drop in almost five years. Bank of America Corp. and JPMorgan Chase & Co. sank more than 3.5 percent. Raw-material and industrial shares, led by airlines, were headed toward the steepest two-day slide since 2011. European equities continued to bear the brunt of the selling, with the Stoxx Europe 600 Index down 4.1 percent to its lowest since February.

The Standard & Poor's 500 Index dropped 1.8 percent, to 2,000.15, as of 11:36 a.m., holding at a three-month low. The benchmark fell below its average prices during the past 100 and 200 days. The Dow Jones Industrial Average lost 263.01 points, or 1.5 percent, to 17,137.74, trimming losses of as much as 334 points. The Nasdaq Composite Index decreased 2.3 percent, on track for the lowest since Feb. 29. Trading in S&P 500 shares was 63 percent above the 30-day average for this time of day.

“Today seems to be a repeat of Friday,” said Ben Rozin, senior analyst and portfolio manager at Manning & Napier Advisors, which manages $37.3 billion. “We came into this year with first-quarter earnings being weak, and we were just beginning to see signs that the second quarter would be better. A big shock isn’t good for confidence or investments. There’s a lot of uncertainty and people weren’t positioned for the vote ahead of time.”

Risk assets have been under pressure since Britons voted to secede from the EU, raising concerns that an already-fragile global economic recovery will falter as trade snarls in one of the world’s biggest consumer blocs. Friday’s losses reversed a weekly advance in the S&P 500 and pushed the CBOE Volatility Index up 49 percent. The measure of market turmoil know as the VIX fell 3.7 percent Monday to 24.80, swinging between gains and losses.

The U.K.’s Brexit vote left investors around the world scurrying toward safe havens for a second session after the S&P 500 on Friday fell 3.6 percent to erase its advance for the year. Investors are watching for policy action by central banks worldwide to ease the turmoil and pump liquidity into financial markets.

“It’s been a very volatile market which we somewhat expected, but even the most ardent of people that could see both sides were surprised by Friday’s move,” said Barbara Reinhard, head of asset allocation for multi-asset strategies at Voya Investment Management, which manages $213 billion. “This is the new normal -- politics could add more volatility to all financial assets. This is in part because central banks have done the lion’s share of lifting for stimulus.”

The next days and weeks will likely be key for central banks as they seek to minimize the damage in trading from Asia to the U.S. European equities extended losses on Monday, even as U.K. Chancellor of the Exchequer George Osborne sought to reassure financial markets, saying contingency plans were in place to shore up the U.K. economy.

The European Central Bank is hosting a three-day meeting in Sintra, Portugal, that will include a speech from its president, Mario Draghi. Federal Reserve Chair Janet Yellen was scheduled to participate in a panel discussion at the gathering Wednesday, but the Fed said Monday she has withdrawn without offering a reason. German Chancellor Angela Merkel will host EU President Donald Tusk in Berlin today to talk about the U.K.’s exit plan.

Traders abandoned bets on future Fed interest-rate increases well into 2017, after expectations for higher borrowing costs this year had crept up before the Brexit vote. Odds of a Fed move by February have fallen to 8 percent, from 52 percent Thursday. The probability of a rate cut when policy makers meet in September rose to 24 percent.

Britain’s departure will unleash as much as $300 billion of selling by automated quant programs in the already-battered U.S. stock market, Marko Kolanovic, the JPMorgan Chase & Co. derivatives strategist, wrote in a note late Friday. Equity investors in the U.S. would be wise to stay away until quant managers finish the rebalancing that was forced on them by the day’s volatility, he said.

“Investors are being given a short line on risk with headlines changing on almost an hourly basis,” said Nick Ford, a London-based fund manager at Miton Group, which oversees the equivalent of about $3.9 billion. “It makes sense people are being cautious. Recent economic indicators in the U.S. have already been disappointing. What happened on Friday makes any Fed action in the near future even less likely.”

Some of the world’s biggest money managers, with a combined $6.7 trillion in assets, are regrouping after the worst day for global equities in almost five years. BlackRock Inc. says the impact on U.S. and Asian shares will be limited and central banks will continue to support growth. Franklin Templeton Investments says investors overreacted and the volatility creates chances to purchase lenders and energy producers.

In Monday’s trading, eight of the S&P 500’s 10 main industries fell, with raw materials and financial shares sinking at least 2.7 percent. Utilities and phone companies, the two best performers this year, edged higher.

Banks in the benchmark index were headed for the steepest back-to-back slide since 2011, when lenders plunged amid Europe’s sovereign debt crisis and a downgrade of the U.S.’s credit rating. Fifth Third Bancorp dropped 6.2 percent, Citigroup Inc. lost 3.3 percent to a four-month low. The KBW Bank Index slumped 4.3 percent to bring its two-day retreat to 11 percent.

Lazard Ltd. and Evercore Partners Inc. posted their biggest two-day declines since 2008, leading a slump of independent investment banks. Moelis & Co. and Greenhill & Co. sank at least 8 percent today to their lowest levels ever.

Concerns that Britain’s EU exit will exacerbate an already weak global growth outlook dragged down raw-materials producers. Glass container maker Owens-Illinois Inc. tumbled 8.2 percent, bringing its decline since Thursday’s close to 17 percent, the largest two-day selloff since 2009. Dow Chemical Co. and Freeport-McMoRan Inc. lost at least 3 percent Monday.

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