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Central Banks on Alert as Brexit Vote Hammers Markets

Chancellor George Osborne Attends Annual Mansion House DinnerChancellor George Osborne Attends Annual Mansion House Dinner
BoE Governor Mark Carney (a Canadian) had been lambasted by pro-Brexit MPs for suggesting markets might not like a vote to Leave.Dan Kitwood Getty Images

The Bank of England promised it would “take all necessary steps” to keep financial markets stable as a day of carnage threatened on London’s financial markets in the wake of Britain’s decision to leave the European Union.

In a statement, the BoE said that it “is monitoring developments closely, has undertaken extensive contingency planning, working closely with Her Majesty’s Treasury, other overseas authorities and central banks (and) will take all necessary steps to meet its responsibilities for monetary and financial stability.”

The pound is facing its worst one-day loss ever, having fallen 12% from over $1.5000 to a low of $1.3241 in the space of only six hours.

However, it appeared to bounce as the referendum result was confirmed, and rose further after David Cameron, the Prime Minister who had led the Remain camp, announced he would resign by October, so that a new Prime Minister can conduct negotiations with the E.U. on future relations between the two sides. By 0330 Eastern Time, it was down ‘only’ 7.5% from before the polls closed.

The Bank of England’s Governor Mark Carney had been slammed by pro-Brexit lawmakers when he testified before a parliamentary committee that leaving the E.U. could cause near-term volatility and long-term damage to the British economy.

The turbulence has already spread far beyond British markets. U.S. stock futures are indicated to open sharply lower, with the Dow 30 futures contract down 3.5%, the S&P500 down 4.5% and the Nasdaq future down 4.4%.

But the bigger impact is being felt in neighboring Europe, where Germany’s stock futures are tipped to open down 9.6% and France’s down 11.7%.

“The world’s currencies, equities and bonds are now on magical mystery tour – at least in the short-term,” said Nigel Green, CEO of financial advisory group DeVere. “Investors around the world on Friday will pile into safety and prompt a significant shift in global markets from risky assets to safe havens.”

“It seems Europe’s worst nightmare has come true,” said Carsten Brzeski, chief economist for ING-Diba in Frankfurt. “The economic and political consequences for both the UK and Europe will be huge.”

Huge, but not completely unexpected. Holger Schmieding, chief economist with Berenberg Bank in Berlin, noted that Brexit “is not a Black Swan” event: “The world as we know it does not end with a Brexit, it just became a more risky place last night.”

That’s been immediately reflected in Europe’s financial markets, where the yield on Germany’s 10-year government bond, the benchmark ‘safe haven’ asset, plummeted from 0.10% before the vote to -0.12% in early trade in Frankfurt. The price of gold, another safe haven asset, surged 4.7% to its highest in nearly two years. Meanwhile, the yield on the corresponding Italian bond, a classic “risk asset” spiked to 1.49% from 1.32%.

After two hours, the ECB released its own statement . The ECB is already a big buyer of sovereign and corporate bonds through its Quantitative Easing program.

Talking to CNBC, the widely-respected Indian central bank governor Raghuram Rajan downplayed comparisons with the shock that hit the financial system after the collapse of Lehman Brothers in 2008.

“It’s not an immediate liquidity shock that goes through the entire system. It’s more of a slow-burning change reflected in this referendum,” Rajan said. “But since it reflects a public mood it is something we need to pay attention to.”

In a short, televised statement, the BoE’s Carney also stressed that the U.K.’s banks were better capitalised, and had better access to liquidity, than in the 2008 crisis. In a statement released over an hour later, the European Central Bank also said it would “provide additional liquidity, if needed, in euro and foreign currencies.”

Rajan, who decided last week to return to academia in the U.S. rather than seek a second term at the Reserve Bank of India, was the only Governor to comment on the causes and consequences of the vote. He said it “reflects a mood of people who are tired of globalization, who are tired of engaging with the world, who are tired of immigrants, and that can mean a big change in the postwar situation where a lot of prosperity was built on free trade and the free movement of people.”

He also warned that the U.K. may struggle to finance its current account deficit, the biggest, proportionally in the G7, if such circumstances.

UPDATE: This story has been updated to incorporate the news of David Cameron’s resignation and sterling’s reaction to it.