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U.S. stocks plunge, markets take Fed rate hike off the table on Brexit

Published 06/24/2016, 12:07 PM
Updated 06/24/2016, 12:07 PM
© Reuters.  Brexit pushes Wall Street lower, Fed futures rule out 2016 hike

© Reuters. Brexit pushes Wall Street lower, Fed futures rule out 2016 hike

Investing.com – Wall Street sank in mid-day trading on Friday while financial markets threw the possibility of a Federal Reserve (Fed) rate hike this year out the window after a surprise victory of Brexit, or a vote for Britain to leave the European Union (EU), in the U.K. referendum.

At 16:04GMT or 12:04 ET, the Dow 30 tumbled 469 points, or 2.61%, the S&P 500 sank 58 points, or 2.76%, while the tech-heavy NASDAQ Composite shed 157 points, or 3.19%.

Selling hit global markets across the board and even though London’s FTSE 100 and cable managed to move off the day’s lows, they both showed considerable losses of 3% and 8%, respectively.

Still, Morgan Stanley predicted higher losses for both British equities and sterling in the next several days, but suggested that U.S. assets across the spectrum (stocks, FX, credit and government bonds) would become “relative safe havens”.

On Friday, investors chose other safe-haven assets with yields on U.K. sovereign bonds, known as UK 10-Year, hitting record lows, while gold rallied to 27-month highs on Friday and the yen hit its highest level against the dollar since November 2013.

Oil, much like stocks, was hit by the risk-off attitude and also sank on the stronger dollar.

Specifically, U.S. crude futures fell 4.37% to $47.92 a barrel by 16:04GMT or 12:04 ET, while Brent oil slumped 4.46% to $48.64.

Energy traders still looked ahead to Friday's rig count report from Baker Hughes for further indications on whether U.S. shale producers are continuing to return online, as oil prices stabilize. A week earlier, the U.S. oil rig count rose by nine to 337 for the week ending on June 10, representing their third straight weekly increase.

Perhaps unsurprisingly, the economic risk associated with Brexit for the U.S. economy caused financial markets to take the possibility of the Fed rate hike this year off the table.

Prior to the U.K. referendum on Thursday, Fed fund futures had shown the probability for a rate hike at the December meeting with odds of 57.3%, according to CME Group’s FedWatch tool.

However, Friday saw those odds tumble with only an 18.2% chance.

Moreover, they began to price in the possibility of a 25 basis point cut as soon as the July 27 decision at 4.8%.

So far on Friday, the only comment from the Fed came in the form of a published statement on their website.

“The Federal Reserve is carefully monitoring developments in global financial markets, in cooperation with other central banks, following the results of the U.K. referendum on membership in the European Union,” the monetary authority said in a statement.

“The Federal Reserve is prepared to provide dollar liquidity through its existing swap lines with central banks, as necessary, to address pressures in global funding markets, which could have adverse implications for the U.S. economy,” it added.

Fed chair Janet Yellen has no scheduled appearances until Wednesday, June 29 when she will attend the ECB forum on central banking, which may be the first time for her to reveal how the Brexit vote has affected her stance on monetary policy.

The first member of the U.S. central bank scheduled to speak after Britain’s decision will be Fed Governor Jerome Powell.

Powell could give indications on the Fed’s stance in reaction to the vote in a speech given on Tuesday, June 28, titled “Interest and Influence: Central Banks and the Global Economic Outlook”.

On Friday’s economic calendar, U.S. orders for long lasting manufactured goods fell more than forecast in May, while core orders unexpectedly declined, adding to the dim economic outlook with regard to business spending in the second quarter.

Lastly, the University of Michigan also revised down its consumer sentiment in June.

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