NEW YORK (REUTERS) - Fears of instability in the European Union and prolonged global stagnation sent stock markets sharply lower on Wednesday as Britain's pound sank below US$1.30 for the first time in more than three decades and US Treasury yields again hit historic lows.
After last week's stock rally when investors bought riskier assets in the days after Britain's decision to leave the European Union, the implications of another round of financial losses, interest rate cuts and central bank money-printing to prop up growth have begun to set in, analysts said.
Wall Street opened lower, following stocks down in Europe and most of Asia.
The Dow Jones industrial average fell 40.51 points, or 0.23 per cent, to 17,800.11 and the S&P 500 lost 3.03 points, or 0.15 per cent, to 2,085.52, although the Nasdaq Composite added 9.33 points, or 0.19 per cent, to 4,832.23.
"Today's decline is not a surprise as investors have had a chance to take a step back and look at things and go, 'Well maybe it's not all that good'," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.
US longer-dated Treasury yields hit fresh record lows, also tripped by fallout from the "Brexit" vote, before stabilising on profit-taking and strong US economic data showing the pace of growth in the service sector increased in June by the fastest pace in seven months.
Benchmark 10-year US Treasury yields fell as low as 1.321 per cent, while 30-year Treasury yields hit 2.098 per cent. Those were unprecedented lows for both.
"The move lower in rates has just been absolutely relentless, and even long-standing bond bulls have been surprised by how quickly we moved to this level," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York. "There's definitely an element of the unknown about what the extent of the actual contagion is from Brexit."
Other safe-haven assets benefited as well, with gold rising to a more than two-year high and the yen soaring to a 3-1/2-year high against the British pound, and to two-week peaks versus the dollar and euro.
Henderson Global on Wednesday became the fourth British commercial property fund to suspend trading, joining three others worth about £10 billion (S$17.4 billion), in the first sign of markets seizing up since Britain's vote to exit the EU.
Money markets are pricing in a good chance of a cut in one or more of the Bank of England's official interest rates to zero within the next three months. Sterling fell as low as US$1.2798 in Asian trading before recovering to US$1.2886.
In Europe, a growing concern is how banks will cope with lower interest rates and writedowns in the value of assets they hold, as well as a new blow to growth that might cool borrowing and threaten more loan defaults.
Italy's bank sector index fell 3 per cent at one point and has surrendered 33 per cent since the June 23 Brexit vote.
China, which has been steadily weakening the yuan while eyes are fixed on Europe, allowed the value of its currency against the dollar to fall to another 5-1/2-year low overnight.
The easing has helped China's bourses remain in positive territory with the Shanghai Composite Index adding 0.4 percent for a fourth straight day of gains and the blue-chip CSI300 index rising 0.3 per cent, its eighth straight rise.