By Patrick Graham
LONDON (Reuters) - Fears that Britain may be on the verge of voting to leave the European Union next week coursed through global financial markets on Monday, sending Asian and European shares sharply lower and the pound to an eight-week low.
With growth looking shaky, worries that the "Brexit" vote could tip Europe back into recession have moved to the head of a list of concerns for investors which includes banks' problems with negative interest rates and dangerous imbalances in China.
A poll late on Friday gave Britain's "Leave" camp a 10-point lead, knocking sterling back by almost 3 full cents against the dollar and driving the worst losses for Asian stock markets in four months. European shares (FTEU3) fell 1.5 percent and Wall Street was set to open 0.3 percent lower.
Other polls have been tighter, but money markets have now abandoned expectations, high just weeks ago, that the U.S. Federal Reserve could raise official borrowing costs on Wednesday, just 8 days before the UK vote. Instead, the worry is that the Fed could use language that quells expectations of a move this year at all.
More broadly, after eight years of ultra-low rates and outright money-printing, investors wonder if central banks have much ammunition left should the uncertainty that a Brexit would bring for thousands of businesses weaken demand and investment further.
"We're in uncharted territory in front of the Brexit vote, and then there's also the Fed this week. So the wall of worry is quite high at the moment," said Zeg Choudhry, managing director at LONTRAD.
"All the banks are a little bit lower, and they're the ones which are likely to get hit. For the next two weeks, you've got to be slightly mad if you've not got your money in defensive stocks."
The news out of China was also poor, with data showing fixed-asset investment slipped below 10 percent for the first time since 2000. Stock markets in Tokyo, Hong Kong and Shanghai all fell by around 3 percent. (HSI)
Moves in Europe, where investors have been preparing for the British vote for months, were only slightly more subdued. The Frankfurt (GDAXI) and Paris (FCHI) stock exchanges both fell around 1.2 percent.
The index of major European bank shares fell 2 percent. (FTMIB) It has been hammered this year by concerns that lenders will struggle as long as they are effectively paying central banks to deposit cash. Any new retreat in expectations for growth and inflation would only worsen that picture.
In contrast, Britain's FTSE 100 (FTSE) fell just 0.4 percent, and both Deutsche Bank (DE:DBKGn) and JP Morgan said they remained overweight UK equities into the vote.
"In the case of a 'Leave' vote in the UK referendum ... we expect UK equities to outperform the European market, given the likely GBP (British pound) depreciation in such a scenario as well as the market's defensive sector structure," Deutsche Bank strategists said in a note.
YEN BREAK
On currency markets, sterling fell almost 1 percent against the dollar <GBP=> after sinking by as much as 3 full cents in value on Friday. It was down by more, 1.2 percent, at 79.86 pence per euro. (EURGBP=)
Options market pricing <EURGBPVOL=> showed expectations for the biggest swings against the euro on record, and analysts at UBS raised the prospect of a cut in British interest rates and another round of quantitative easing if the economy struggles after the referendum.
"If activity does slow further beyond the end of the second quarter, the market is likely to rapidly start considering how (the Bank of England) may choose to enact any further easing," economists from the Swiss group said in a note.
The Bank of England meets on Thursday. (BOE)
Traditionally investors' first choice in times of financial and economic stress, the yen climbed 1 percent against both the dollar and euro. <JPY=> (EURJPY=)
Those gains took the Japanese currency past long-term resistance around 106.50 yen per dollar and put more pressure on the Bank of Japan to act against the currency's 14 percent rise this year when it ends a regular meeting on Thursday.
"While the pound is the worst-performing G10 currency versus the dollar this year, the yen is by far the best," said Derek Halpenny, European Head of Global Markets Research at Bank of Tokyo-Mitsubishi in London.
"The continued surge of the yen will lift expectations that the BOJ may surprise the markets and announce some additional monetary easing."